Has the US dollar’s winning trade just hit its biggest wall in months?

The dollar’s rally is running into resistance as traders scale back some of the more aggressive Federal Reserve rate-hike bets that had powered the greenback higher.

A softer US labour-market signal helped trigger the shift, but the move is now broader than one data point.

The euro and sterling are gaining ground, commodity-linked currencies are recovering, and the yen has finally found relief after sliding to levels that kept Tokyo on intervention watch.

The dollar has not lost its yield advantage, but the market is no longer treating further Fed tightening as a one-way trade.

Majors claw back ground

The dollar index slipped 0.2% to 100.77 in Asian trade, leaving it on course for its steepest weekly decline in nearly three months.

The euro hovered near a two-week high at $1.1442, while sterling held around $1.3361 and was heading for its strongest weekly gain since April.

Risk-sensitive currencies also improved. The Australian dollar traded near $0.6935, putting it on track to snap a four-week losing streak.

New Zealand’s kiwi was around $0.5702, up more than 1% for the week.

The move suggests traders are trimming crowded dollar positions rather than abandoning the currency outright.

The greenback still has support from relative yield differentials, but the momentum that carried it higher through June has weakened.

Fed repricing eases dollar pressure

Rate markets have moved quickly. Traders now see a lower probability of a September Fed hike than they did earlier in the week, reducing one of the dollar’s strongest tailwinds.

Two-year Treasury yields, which are closely tied to policy expectations, also pulled back after three straight sessions of gains.

FX strategists see the shift as mildly dovish because it reduces pressure on the Fed to move more aggressively.

Still, the dollar’s broader outlook remains constructive as long as markets continue to price in some chance of further tightening.

That leaves currency markets in a delicate middle ground. The dollar is no longer surging, but it is not yet in a clear downtrend either.

The next leg will depend on whether incoming inflation and activity data confirm that policy pressure is easing.

Yen relief comes with intervention risk

The yen traded near 161.01 per dollar after rebounding nearly 1% in the previous session.

The move gave Japan’s currency some breathing room after its slide to multi-decade lows, but traders remain alert to official action from Tokyo.

Japanese authorities have signalled a more targeted approach to stabilising the currency, aimed at raising the cost of speculative bets against the yen.

Policy advisers have also argued that the Bank of Japan should continue raising rates gradually to reduce pressure on the exchange rate.

For now, analysts see the 162.83 area as the near-term top for dollar-yen.

Whether that becomes a lasting peak will depend on US yields, Japanese bond markets and how forcefully Tokyo pushes back.