U.S. Dollar Extends Gains as Markets Weigh Mixed Data Ahead of Key Jobs Report

The U.S. dollar was on track for a third consecutive daily gain on Thursday, although mixed economic signals kept investors cautious as they awaited the release of the closely watched nonfarm payrolls report on Friday. While recent data painted a nuanced picture of the U.S. economy, markets appeared reluctant to take strong directional positions ahead of clearer guidance on the labor market and monetary policy.

The U.S. Dollar Index, which tracks the greenback against a basket of six major currencies, edged up 0.06% to 98.793. Despite the recent rebound, the dollar is coming off its weakest annual performance since 2017, and many analysts continue to forecast further downside over the course of the year as interest rate expectations evolve.

Mixed U.S. Data Sends Conflicting Signals

Economic data released on Thursday underscored the complexity of the current U.S. outlook. Labor market figures suggested conditions remain subdued, with job openings falling more than expected in November and hiring activity also slowing. The data reinforced the notion that the labor market is stuck in a so-called “no hire, no fire” phase, where employers are reluctant to expand payrolls but also hesitant to make layoffs.

At the same time, the services sector delivered a more encouraging signal. Activity in the sector unexpectedly accelerated in December, indicating that the U.S. economy may have ended 2025 on firmer footing than previously thought. Given that services account for a large share of overall economic output, the pickup helped offset concerns about weakening labor demand.

The mixed readings left markets cautious. While softer labor indicators typically support expectations for looser monetary policy, resilient services activity complicates the outlook by suggesting underlying economic momentum remains intact.

Federal Reserve Outlook and Fiscal Concerns

Interest rate expectations continue to play a central role in dollar pricing. Traders are currently pricing in at least two interest rate cuts from the Federal Reserve this year. However, policymakers signaled in December that only one cut may be delivered in 2026, reflecting divisions within the central bank over the inflation and growth outlook. The Fed is widely expected to keep rates unchanged at its upcoming meeting later this month.

Geopolitical risks have largely faded into the background for now, with investors focusing more intently on economic fundamentals. That said, several potential risks remain on the horizon. One concern is the possibility that the U.S. Supreme Court could rule against tariffs imposed under President Donald Trump’s administration, potentially forcing the government to refund more than $133.5 billion to importers. Such a development could reintroduce volatility into currency markets and weigh on the dollar.

Fiscal concerns also resurfaced after President Trump said the U.S. military budget should rise to $1.5 trillion in 2027. The proposal revived worries about rising government debt and the possibility of a higher risk premium being demanded by investors holding U.S. assets.

Euro Pressured by Inflation Data and Policy Debate

In currency markets, the euro remained under pressure following recent inflation data from the euro zone. The single currency slipped 0.05% to $1.1669 on Thursday, extending losses after falling 0.45% over the previous two sessions. German government bond yields dropped to a one-month low, reflecting easing inflation pressures and subdued growth expectations.

While inflation in the euro zone is moving back toward the European Central Bank’s target and core inflation is edging lower, analysts noted that policy discussions are already shifting toward the possibility of a rate hike sometime next year. For now, however, softer inflation data has reduced near-term support for the euro.

Geopolitical developments also added to uncertainty in Europe. U.S. Secretary of State Marco Rubio said President Trump retains the option of using military means to pursue U.S. objectives regarding Greenland. The comments alarmed European allies, including France and Germany, which are reportedly working on a coordinated response.

Yen Steady, Asia-Pacific Currencies Mixed

The Japanese yen was little changed at 156.70 per dollar, as domestic factors and global risk sentiment offset each other. Japanese equity markets saw divergence, with shares of chemical manufacturers falling after China announced an anti-dumping investigation into imports of chemicals used in semiconductor production. In contrast, shares of Chinese chemical companies jumped on expectations that domestic firms could benefit from the probe.

In the Asia-Pacific region, the Australian dollar eased slightly to $0.6704, pulling back from a 15-month high reached earlier in the week. The currency has been supported by improved risk sentiment and commodity prices, but traders appeared cautious ahead of the U.S. jobs data.

Focus Shifts to Nonfarm Payrolls

With markets finely balanced, attention is now firmly on Friday’s U.S. nonfarm payrolls report. The data is expected to provide crucial insight into the health of the labor market and could significantly influence expectations around the timing and pace of Federal Reserve rate cuts. Until then, currency markets are likely to remain range-bound, with the dollar supported in the short term but facing broader questions about its longer-term trajectory.