By Felipe Barragán, Expert Research Strategist at Pepperstone
October 4, 2025 –
“The dollar spent Friday trading on the back foot as the “visibility problem” facing U.S. macro policy grew larger. Two forces did most of the work. First, the government shutdown has throttled the data pipeline—delaying the official jobs report and forcing investors and the Fed to lean on private surveys and market proxies. That alone tends to favor lower yields at the margin and a softer dollar, and it comes alongside headlines that underscore how politicized the fiscal backdrop has become. Markets read that combination as growth-negative and policy-uncertain rather than dollar-supportive.
Second, the September ISM services report landed right on the expansion/contraction threshold. The headline fell to 50 from 52.0, with business activity slipping into decline for the first time since the pandemic era and new orders barely expanding. The employment gauge improved a touch but remained in contraction. It’s the kind of “stall-speed” print that typically pulls rate expectations forward—and that’s exactly what happened: traders are now effectively assuming the Fed cuts again at the October meeting and, with high probability, in December as well. That shift lowers the dollar’s carry advantage and keeps DXY tactically heavy.
Earlier in the week, manufacturing told a similar story: the ISM factory index rose, but stayed in contraction for a seventh straight month, with weak orders and soft hiring—a backdrop that doesn’t rescue the dollar when services are wobbling. The bond market responded with a gentle bull-bias as shutdown-thinned trading met a weaker growth mix; lower yields remove another prop from under the greenback. Abroad, the picture is more nuanced but still dollar-unfriendly at the margin: euro-area services PMIs ticked higher again, hinting at a modest growth pulse that helps the euro stabilize when U.S. data are cooling. None of this is a runaway EUR story, but it does chip away at DXY when the U.S. exceptionalism narrative softens.
Will these forces keep steering the dollar? Near-term, yes—so long as three conditions persist.
First, if the shutdown continues to delay critical releases (like payrolls), the market will turn to risk-management mode: fade the dollar’s carry, prefer duration, and hedge with gold.
Second, if Fed-speak leans toward labor-market risk management rather than inflation vigilance—and the ISM mix encourages that—cut pricing will stay sticky for October and likely December.
Third, unless global data roll over sharply, the relative-growth cushion that supported the dollar for much of the past year looks thinner; even modest stabilization in Europe or Asia reduces DXY’s upside skew. Put together, the dollar’s path of least resistance remains sideways-to-softer into the next Fed meeting, punctuated by headline risk from Washington and any surprise rebound in U.S. price pressures that would revive the inflation-first narrative.”