As traders trimmed expectations for a Federal Reserve rate hike this month and a sharp yen rally rippled through global currency markets, the dollar weakened entering September. After touching its lowest level since May on Thursday, the Bloomberg Dollar Spot Index is poised for a weekly decline of roughly 0.7%.

Following Fed Governor Christopher Waller's remarks highlighting progress on inflation, investors now assign about a 50% probability to a rate increase at the Fed's September 16 policy meeting. Meanwhile, lingering concerns over the U.S. fiscal outlook have added further pressure on the central bank.

In Japan, the yen is on track for its strongest week since July, advancing 2.7% against the dollar. The move has been fueled by market expectations that the Bank of Japan could raise its benchmark rate by 25 basis points this month, while leaving the door open for more rapid subsequent hikes. Noah Bafum, a strategist at Canadian Imperial Bank of Commerce Capital Markets, noted, "The dollar has pulled back this week as Fed officials struck a dovish tone, and the yen's sharp gains have spilled over into broader dollar assets."

Traders question the likelihood of a Fed rate hike, sending the dollar to its lowest point since May. The spotlight now shifts to Friday's nonfarm payrolls report (with the August unemployment rate expected to hold steady at 4.1%), followed by a critical consumer price index (CPI) reading next week. These data releases are likely to shape market expectations for the Fed's next move, thereby determining the dollar's trajectory. Jayati Bhardwaj, head of FX strategy at TD Securities, remarked, "If the inflation data comes in as expected, it will help the Fed avoid a September hike, keeping the broader macro backdrop tilted against the dollar."

Prior to this week's slide, speculative traders had already begun reducing their bullish dollar positions. According to data from the U.S. Commodity Futures Trading Commission (CFTC), hedge funds, asset managers, and other traders cut their net long dollar positions to approximately $27.6 billion in the week ending August 25. That is down from nearly $50 billion in late July, when bullish positioning had reached its largest scale since 2014.

Wall Street strategists are also bracing for further weakness. Bank of America has recommended selling the dollar against the yen, forecasting that the yen will appreciate to 149 per dollar by year-end. Meanwhile, TD Securities maintains a "mildly bearish" outlook on the dollar for the remainder of the year.