Title: US Dollar Extends Gains as Fed Outlook Stays Hawkish; Other Majors Slip
Original Article Credit: Mitrade News Team
Original Source: https://www.mitrade.com/insights/news/live-news/article-8-1154337-20250927
The US dollar remained strong in the global currency market, reflecting persistent investor confidence in the Federal Reserve’s hawkish monetary policy stance. Its strength, driven by expectations of prolonged higher interest rates, kept other major currencies, including the euro, pound, and yen, under pressure. As markets digested recent economic data and Federal Reserve commentary, currency traders positioned themselves defensively ahead of key economic reports and central bank decisions.
This article provides a comprehensive breakdown of the US dollar’s rally, factors contributing to its strength, and the impact on other major global currencies. It also previews upcoming events likely to influence the forex market in the near term.
US Dollar Index Climbs on Yield Momentum
The US Dollar Index (DXY), which tracks the greenback’s value against a basket of six major currencies, extended its upward trend, inching closer to yearly highs. The index rose to 106.84, showing its highest weekly increase in nearly six months.
Key contributing factors to the dollar’s appreciation:
– Continued support from rising US Treasury yields
– Strong economic data, including robust consumer spending and solid job market fundamentals
– Investor expectations that the Federal Reserve will keep interest rates elevated for longer than previously anticipated
Benchmark 10-year US Treasury yields remained above 4.5 percent, their highest level since 2007. This surge in yields made the dollar increasingly attractive to investors seeking safer returns. Meanwhile, shorter-term yields such as the 2-year note hovered around 5.1 percent, reinforcing the narrative of prolonged policy tightening by the Fed.
Federal Reserve’s Hawkish Tone Reinforced
Several Federal Reserve members made public statements reinforcing the central bank’s current cautious approach toward future rate cuts. While the Fed left rates unchanged at its most recent policy meeting, it hinted at at least one more rate hike before the end of the year and fewer rate cuts in 2024 than markets had previously priced in.
Highlights from recent Fed commentary:
– Fed Chair Jerome Powell reiterated that inflation remains too high and that the Fed is committed to its 2 percent inflation target
– Minneapolis Fed President Neel Kashkari suggested that a soft landing might involve some economic pain and that more tightening might be necessary
– Other regional Fed presidents echoed similar tones, suggesting rate cuts would not materialize until inflation clearly trends toward target
The implication is that monetary policy will remain restrictive through the first half of 2024, giving the dollar continued upside support.
Euro Retreats Below 1.06
The euro struggled against the dollar, falling to its lowest level since March at 1.0560. The decline was largely attributed to:
– Dovish European Central Bank (ECB) signals post their last rate hike
– Weak eurozone economic indicators, including drop in manufacturing and services activity
– Rising odds of a eurozone recession by year-end
ECB President Christine Lagarde recently acknowledged a weaker economic outlook for the bloc, and investors are now pricing in a more prolonged pause in ECB tightening. The monetary divergence between the Fed’s hawkish rhetoric and the ECB’s cautious stance has widened, prompting further euro depreciation.
Market analysts expect that unless inflation data shifts significantly or the ECB adopts a more aggressive posture, the euro may continue to trend lower against the dollar.
British Pound Touches Six-Month Low
The British pound also edged lower, dropping below 1.22 after the Bank of England (BoE) kept rates unchanged for the first time in nearly two years. The BoE’s unexpected pause came on the heels of markedly weaker UK inflation data, which signaled that prior rate hikes may have begun to cool price pressures.
Notable factors impacting the pound:
– UK Consumer Price Index (CPI) grew at
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