US Dollar Index: DXY Follows Yields To Reestablish Multi-Day Highs Below 103.00 In Advance Of US ISM Services PMI

During the early hours of Thursday in Asia, US Dollar Index (DXY) bulls take a respite at the highest levels in three weeks, ranging between 102.60 and 70. In doing so, the Dollar index against the six major currencies maintains the previous three-day uptrend ahead of a slew of US employment, inflation, and economic activity data.

On Wednesday, the DXY appreciated the risk-averse sentiment and benefited from the high US Treasury bond yields. The robust US ADP Employment Change data for July is also likely to have favoured the bulls of the US Dollar Index.

However, the downgrade of the US government's credit rating by Fitch Ratings signalled concerns of a US default and dampened sentiment, which boosted demand for the US Dollar as a safe haven. In addition, the US ADP Employment Change for July exceeded market expectations of 189K, rising to 324K, while the previous readings were revised down to 455K, which boosted the DXY.

In addition, the US Treasury Department raised the possibility of testing demand for US bonds after the rating reduction by increasing the weekly issuance of longer-term debt, which boosted bond coupon prices and the DXY.

Wednesday evening, US Treasury Secretary Janet Yellen and White House (WH) Economic Adviser Jared Bernstein defended the creditworthiness of US Treasury bonds. After Fitch Ratings cited such concerns as the impetus for their downgrade of the US government's credit ratings, policymakers also vouched for the nation's economic fortitude.

In this context, 10-year US Treasury bond yields reached their highest level since November 2022, while Wall Street benchmarks closed in the red. Despite this, S&P500 Futures remain stagnant at a two-week low after falling for two consecutive days.

In the future, the US Dollar Index may experience a lack of bullish momentum during the Asian and European sessions due to a cautious disposition preceding the release of the most important US economic data. However, negative sentiment and yesterday's technical breakout keep DXY investors optimistic as they await the US ISM Services PMI, Factory Orders, Weekly Initial Jobless Claims, and quarterly Nonfarm Productivity and Unit Labour Costs readings.

It should be noted that market participants have been bullish on the U.S. dollar and will drive the greenback higher if the expected data are positive. In spite of this, the latest Reuters poll of approximately 40 FX Strategists concluded that the USD will maintain its value against the majority of major currencies over the next three months, as a robust domestic economy bolsters expectations that interest rates will remain elevated for an extended period of time.