Dollar Slides Ahead of Key Jobs Data as Yen Strength and Dovish Fed Bets Weigh

The U.S. dollar weakened on Wednesday, coming under renewed pressure ahead of the release of closely watched U.S. employment data that could shape expectations for Federal Reserve interest rate cuts later this year and into 2026.

By 04:36 ET (09:36 GMT), the dollar index, which measures the greenback against a basket of major peers, slipped 0.2% to 96.57, extending its recent pullback as investors positioned cautiously ahead of the labor market report.

The Japanese yen was a key driver of the dollar’s decline, continuing a strong rally that began after Prime Minister Sanae Takaichi’s decisive election victory over the weekend. The dollar fell 0.8% against the yen to 153.12, taking its losses since last Friday to around 2.5%. The euro also weakened against the yen, sliding 0.6% to 182.50.

Against the dollar, however, the euro edged higher by 0.2% to $1.1918, while sterling and the Swiss franc also posted gains versus the greenback, reflecting broad-based softness in the U.S. currency.

Investor sentiment has been further dented by signs of stalling U.S. retail sales, reinforcing concerns that the world’s largest economy could be heading toward slower growth in 2026. As a result, expectations for a more dovish Federal Reserve later this year have strengthened, with CME FedWatch data showing a rising probability of an interest rate cut as early as April.

Jobs data in focus

Markets are now squarely focused on a delayed U.S. employment report due at 08:30 ET, which is expected to show that the economy added around 66,000 jobs in January, up modestly from 50,000 in December.

At its most recent policy meeting, the Fed characterized the labor market as “stabilizing” following a period of weakness. Combined with signs of steady—though still elevated—inflation, this assessment prompted policymakers to keep interest rates unchanged in a 3.5% to 3.75% range.

However, White House economic adviser Kevin Hassett cautioned earlier this week that rapid advances in artificial intelligence could weigh on job creation in the months ahead, even as productivity improves. This warning has added another layer of uncertainty to the outlook, given the Fed’s dual mandate of maximum employment and price stability.

Analysts note that the upcoming jobs report, alongside Friday’s consumer price index release, could be critical in shaping expectations for the policy path in 2026. ING analysts described the employment data as “pivotal” for currency markets, warning that a materially weak reading could prompt investors to fully price in an April rate cut. In that scenario, they see the dollar index testing the 96.0 level.

Australian dollar jumps to three-year high

In Asia-Pacific markets, the Australian dollar stood out as a top performer, climbing to a three-year high after hawkish remarks from Reserve Bank of Australia officials.

RBA Deputy Governor Andrew Hauser said on Wednesday that inflation remains uncomfortably high and that current interest rates are not restrictive enough to bring it back under control. His comments followed the RBA’s 25-basis-point rate hike last week—the central bank’s first increase in two years—as policymakers respond to a resurgence in inflation late in 2025.

Hauser’s remarks fueled expectations that further rate hikes could be on the table this year, lending strong support to the Aussie. Investors are now awaiting first-quarter inflation data to assess whether the RBA will tighten policy again.

Overall, with U.S. data risk looming and global central banks moving at different speeds, currency markets remain volatile, leaving the dollar vulnerable to further downside if incoming figures reinforce the case for earlier Fed easing.