Dollar Falls, Euro & Pound Pull Back from Peaks Ahead of Fed
The US dollar weakened again on Wednesday (January 28th), dropping to a near four-year low, extending the sharp losses from the previous session. Markets are now holding their breath ahead of the Federal Reserve's interest rate decision, which will be announced in the coming hours. At 4:00 AM ET (9:00 AM GMT), the Dollar Index fell 0.1% to 96.010, an area last seen in February 2022, after falling 0.5% on Tuesday.
Pressure on the dollar is mounting due to two factors: uncertainty surrounding the policies of President Donald Trump's administration and market concerns about the Fed's independence. Traders are also confused after US authorities conducted "rate checks" on the USD/JPY level late last week—an action often seen as an early sign of intervention. Trump's comments dismissing concerns about dollar weakness have fueled speculation about whether a weak dollar is now a "goal" that is being allowed to happen. ING analysts said Trump's stance could raise major questions about the direction of the Treasury Department's US dollar policy.
The Fed itself is widely expected to hold interest rates at this meeting. Therefore, market attention will be focused on Chair Jerome Powell's statement for clues about when rate cuts might begin this year. ING believes that if the Fed shifts to "pause" mode (holding further action), the dollar could receive some support. However, if the dollar continues to close lower despite rising short-term US yields, it would signal a very strong bearish dollar momentum.
Another troubling issue is Powell's term, which is expected to end in May, while Trump has said he will soon announce the next Fed chair. Trump has repeatedly criticized Powell for being too slow in lowering interest rates. Market concerns are that this change could diminish the central bank's independence.
In Europe, the EUR/USD pair fell 0.4% to 1.1988, retreating after briefly breaking its highest level since June 2021 due to a weakening dollar. Investors now await the ECB meeting next week, where it is expected to hold interest rates at 2% for the fifth consecutive meeting. However, Austrian central bank official Martin Kocher said the ECB may need to consider another cut if the euro strengthens too much and suppresses inflation. GBP/USD also fell 0.4% to 1.3794, after hitting its strongest level since October 2021 the previous day.
In Asia, the USD/JPY pair rose 0.2% to 152.58, after falling sharply this week on speculation of intervention from Tokyo. Markets are watching for possible joint US-Japan measures to curb the yen's weakening, especially after Prime Minister Sanae Takaichi warned of excessive yen volatility. Meanwhile, the USD/CNY pair fell 0.1% to 6.9451 (a 31-month low), in line with the strengthening of the yuan, supported by Beijing's policies.
The AUD/USD pair fell slightly to 0.7003 after stronger-than-expected Australian inflation data, fueling speculation the RBA could raise interest rates next week.
Source: Newsmaker.id
