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Dollar Index Strengthened by Fed's Cautious Stance, Rate Cut Expectations Diminish
The Dollar Index (DXY) increased by 0.36% on the 19th, closing at 97.364 and marking its second consecutive day of gains. This movement followed the Federal Reserve's decision to lower its benchmark interest rate by 0.25 percentage points, a move largely anticipated by the market. However, Federal Reserve Chair Jerome Powell's comments signaled a restrained view on future rate cuts, diminishing hopes of aggressive monetary easing and bolstering the dollar's appeal. Initially, the dollar dipped to 96.224—its lowest point since February 2022—but quickly regained strength due to favorable economic indicators.
The Federal Reserve framed the rate cut as a precautionary measure against risks such as slowing labor market performance. Despite this, market participants were hoping for more explicit dovish signals to justify sustained dollar weakness. Instead, jobless claims data exceeded expectations, and underlying hiring metrics reflected resilience, reversing the earlier drop in the currency.
Eric Theoret, a foreign exchange strategist at Scotiabank, explained, “Market sentiment had leaned excessively dovish, creating an environment where stronger evidence of easing was required to drive further declines in the dollar. Ultimately, robust economic data contributed to its quick rebound.”
Pound, Euro, and Norwegian Krone Struggle Against a Strengthening Dollar
The British pound briefly rallied following the Bank of England's (BoE) decision to maintain its interest rate and adjust its annual bond sales target, reducing it from £100 billion to £70 billion. However, market optimism was short-lived. The pound succumbed to renewed dollar strength, shedding 0.6% and ending the day at $1.3551. MacroHive's Benjamin Ford noted, “The pound is currently positioned too bearish. There remains potential for recovery in the medium term as sentiment stabilizes.”
Similarly, the euro experienced an initial surge to $1.1918 in response to the Federal Reserve's announcement. Yet, these gains quickly unraveled as the currency dropped 0.2% to settle at $1.1789. The lack of clear dovish signals from the Fed dampened enthusiasm for the euro's rally.
Meanwhile, the Norwegian krone fell 0.5% against the dollar as Norway's central bank cut its key interest rate by 0.25 percentage points to 4.0%. This marked its second rate reduction within three months, adding to the krone's vulnerability against a bullish dollar.
Widening Yield Differentials Weigh on Yen and Won; Bitcoin Continues Recovery
The Japanese yen faced renewed pressure as the dollar-yen exchange rate rose to 147.88, marking a weekly high with a 0.6% gain. This decline in the yen's valuation was largely attributed to widening yield differentials stemming from rising U.S. Treasury yields and cautious market sentiment ahead of the Bank of Japan's (BOJ) upcoming monetary policy meeting.
While markets assign roughly a 50% probability to a possible 0.25 percentage-point rate hike from the BOJ before year-end, expectations remain muted regarding immediate policy changes at this week's meeting. A Tokyo-based foreign exchange dealer stated, “The dominant sentiment is that the BOJ will maintain the status quo for now, and the strength of U.S. economic data is amplifying pressure on the yen.”
The South Korean won also faced challenges, as the won/dollar exchange rate climbed to around 1,388. This depreciation was driven by the persistent policy rate differential of 1.75 percentage points between South Korea and the United States, coupled with growing concerns over potential capital outflows impacting South Korea's currency markets.
In contrast, Bitcoin (BTC) maintained its bullish trajectory, gaining 1.9% to trade at $11,783.7 in the latest session. This recovery highlights resilience within the digital asset space amid broader fluctuations in traditional financial markets.
