Dollar Drops Ahead of US Treasury Buyback, Markets Eye Data-Heavy Thursday

The US dollar index weakened broadly on Wednesday, breaking below the 99.00 support zone and currently trading near 98.83, well below the 100.00 psychological level. This decline was primarily driven by a recent string of soft US economic data and cooling market expectations for Federal Reserve rate hikes.

**Soft Data Dampens Rate Hike Expectations**

Recent data showed US July retail sales fell 0.6% month-over-month, the largest decline in over a year, while nonfarm payrolls and CPI data both came in moderate. Following the data release, CME FedWatch showed market odds for a September rate hike had plunged from roughly 75% to about 30%, with expectations shifting toward the Fed holding steady. Kit Juckes, chief FX strategist at Societe Generale, said traders are selling the dollar because they worry about US economic growth prospects and the Fed's rate response strategy amid weak data.

**Focus on Fed Minutes and Key Data**

Markets are closely monitoring the upcoming dense slate of events to gauge the dollar's next moves. In the early hours of August 20 Hong Kong time, the Fed will release minutes from its July monetary policy meeting, with markets focusing on internal divisions over the inflation path. Additionally, the US Treasury will hold a 20-year bond auction this week, with metrics such as the bid-to-cover ratio testing market absorption capacity. Subsequently, data including US initial jobless claims, the Philadelphia Fed manufacturing index, and Markit PMI flash readings will be released, with any below-consensus figures potentially further lowering rate hike expectations and fueling continued dollar declines.

**Structural Contradictions Pressure the Dollar**

While the dollar weakens, long-end US Treasury yields are climbing on concerns over fiscal deficits and supply glut, reflecting deep structural contradictions. Reports indicate the US annual fiscal deficit is approaching $2 trillion, with term premiums rising to around 0.83%. This yield increase, driven by "fiscal worries" rather than "rate hike expectations," has failed to support the dollar and instead intensified market concerns over US assets.