Dollar Weakens on Investor Caution Over Fed Policy

18 Apr 2024 , 10:57 AM

On Thursday, the dollar experienced weakness as investors evaluated the outlook for interest rates in the United States following remarks made by Federal Reserve officials that reinforced the belief that the monetary policy would stay tight for some time to come.

A string of solid U.S. economic data and ongoing inflation have dampened expectations of rate decreases in the foreseeable future, which has resulted in the dollar strengthening in recent weeks. The dollar’s attractiveness as a secure asset was further enhanced by the Middle East’s simmering tensions.

The yen has remained stuck at 34-year lows due to the strength of the dollar, which has caused traders to worry about potential intervention. As a result, Japanese officials have issued multiple warnings. Additionally, under pressure have been emerging-market currencies. In their first trilateral finance dialogue on Wednesday, the United States, Japan, and South Korea decided to “consult closely” on foreign currency markets, a gesture that acknowledged Tokyo and Seoul’s concerns over the recent significant drops in their respective currencies.

The euro saw some weakness on Thursday, closing at $1.0664, after recording a 0.5% gain on Wednesday and recovering from a two-day, five-month low. At $1.2449, sterling was up 0.02% for the day.

With traders consolidating positions, the dollar index, which compares the value of the US dollar to six other currencies, was barely moving from its five-and-a-half-month high of 106.51 on Tuesday. It was last at 105.97. This year, the index is up 4.5%.

According to the CME FedWatch Tool, markets are pricing in 44 basis points of rate cuts from the Fed this year, which is significantly less than the 160 basis points that were anticipated at the beginning of the year. September is now the latest month for the easing cycle to begin.

Before, traders had anticipated that the Federal Open Market Committee (FOMC) would begin reducing interest rates in June. However, a number of data points, such as the consumer price index (CPI) and retraction from central bankers, have changed that anticipation.

A Federal Reserve poll released on Wednesday revealed that the U.S. economy expanded little between late February and early April, and businesses indicated they expected inflation pressure to remain stable.

Fed Governor Michelle Bowman stated on Wednesday that although efforts to bring down U.S. inflation may have stopped, it is still unclear if current interest rates would be sufficient to bring inflation back to the Fed’s 2% target.

The value of the yen increased by 0.05% to 154.29 against the dollar on Tuesday, but it was still near the 34-year low of 154.79. Currency has dropped 8.65% in the current year.

Even though they thought Japan may intervene at any time, market players upped the bar for potential action by Japanese authorities to support the yen, pointing to 155 instead of the prior 152 level.

The last time Japan entered the currency market was in 2022, when it spent an estimated $60 billion to support the yen.

The Australian dollar remained relatively stable at $0.6439, while the New Zealand dollar slightly decreased to $0.5914 following a 0.6% increase on Wednesday.

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