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US FX WRAP: Dollar hit by dovish Fed Waller

Sessions like this follow a familiar sequence: a single senior official tilting away from the next meeting's hike reprices the front of the curve, and the dollar retraces a large part of the prior week's gains as money markets settle back to roughly 50/50 between hold and hike.

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US FX WRAP: Dollar hit by dovish Fed Waller

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USD was broadly weaker against peers, weighed by Fed Governor Waller's speech dampening Sept hike bets. Also, additional Yen strength following intervention speculation on Wednesday added further pressure to the DXY. Back to the Fed, Waller's showed an inclination towards holding over hiking in September, "to support holding rates steady" if Aug inflation data shows continued progress vs. if inflation comes in hot, "would consider a hike". Waller's inflation outlook is benign when compared to the hawkish dissenters. He only sees "some" upside risk to inflation, with wage growth consistent for him with an inflation return to 2%. He's also willing to allow for another pause to allow for disinflation, citing little cost to waiting one meeting. DXY has largely erased last weeks gains, as money markets return to pricing 50/50 of a hold/hike in September.

US data saw the ISM Services PMI beat expectations, while the prices component accelerated further with employment little changed. Initial and continuing claims confirmed a low-layoff environment, further highlighted by the Challenger Layoffs in August printing 52,881, -39% Y/Y. Ahead of NFP on Friday (exp. +56k), Revelio Labs Nonfarm Payrolls came in at +36.5k.

Alternative USD havens, JPY and CHF were the best performers on Thursday. The former, boosted by optimism over MOF support for the currency, saw USD/JPY hit lows of 155.30 against a Wednesday high of 160.39. Meanwhile, the CHF was supported by a hotter-than-expected August CPI reading, +0.8% Y/Y (exp. 0.5%, prev. 0.4%), +0.4% M/M (exp. 0.0%, prev. -0.1%). USD/CHF hit lows of 0.8052 before trimming to 0.8076. CHF/JPY dropped to 192.12, a level last seen in November 2025.

Context

Waller sits among the more credible signalers on the committee, so his conditional framing, hold if inflation shows continued progress, hike only if it comes in hot, raises the sensitivity of the next CPI print to an unusual degree and effectively transfers the September decision to the data. The distinction worth drawing is between a dovish read on the near meeting and on the path: his willingness to tolerate another pause and his benign wage assessment argue for the former, and positioning rather than policy substance has historically driven the size of the FX move in such cases. The yen leg compounds it, with intervention speculation around the 160 area having tended to produce sharp, self-reinforcing JPY rallies even before any official confirmation, a pattern where the threat of action does as much work as action itself. The franc's strength on a hot CPI print is the cleaner idiosyncratic story and leaves CHF/JPY stretched at multi-month lows. The tells going forward are whether other Fed officials echo the conditional-hold language, whether the Japanese authorities validate the intervention chatter, and whether payrolls and the following inflation release confirm or reverse the dovish repricing.

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