Dollar Index Softer Post-ISM Services Miss, but Dollar Bulls Hold Firm

The DXY dollar index experienced a slight pullback following the weaker-than-expected ISM Services report, which heightened expectations for a December 18 Federal Reserve rate cut. The data underscored the Fed’s ongoing easing cycle, with US yields falling as markets digested the softer print. Despite recent chatter around the implications of the incoming US administration, the Fed’s trajectory remains a dominant driver for the dollar.

The ISM data underscored a cooling in the US services sector, which accounts for over 70% of US GDP. It highlighted vulnerabilities in domestic demand and wage pressures, elements that continue to inform the Fed’s cautious approach. The softer print aligns with prior labor market signals. Looking ahead, 2025 is expected to see Donald Trump amplify the “dollar bubble” through expansionary fiscal policies. ING talk about speculation about a potential Plaza-style accord to weaken the dollar appearing premature, likely becoming a discussion for 2026 or later in their view. They note that historical parallels, such as the Plaza Accord following President Reagan’s policies, suggest a multi-year lag before coordinated action might take place.
In the immediate term, the US data calendar is relatively light today, with weekly jobless claims offering limited directional cues. The focus will shift to tomorrow’s Non-Farm Payroll (NFP) data, a critical indicator that could decisively shape the dollar’s near-term path. Despite the recent dip in short-dated yields, European developments—ranging from economic stagnation to geopolitical tensions—continue to provide underlying support for the DXY. Notably, robust dollar demand is expected to emerge should the index dip below the 106 threshold, reinforcing its relative bid in the global market landscape.