US Dollar Weakens, Is the Fed Ready to Cut Interest Rates?
The US Dollar Index (DXY) fell to around 98.70 in the Asian session Tuesday morning, below the 99.00 level, as markets grew increasingly confident that the Fed would cut interest rates again this week. The dollar's weakening occurred ahead of the Fed's policy decision on Wednesday, which is expected to cut its benchmark interest rate by 25 basis points to a range of 3.75%–4.00%. Market participants consider the chance of a cut almost certain, with a probability of around 97% according to fed funds contract prices. Expectations that US interest rates will fall have slightly reduced the dollar's appeal.
The market will also be monitoring Fed Chairman Jerome Powell's comments after the interest rate decision. An overly dovish tone could put further pressure on the dollar, signaling that the central bank is ready to continue cutting interest rates to support the slowing US economy amid the government shutdown and a weakening labor market. However, if Powell sounds cautious about inflation remaining above the 2% target, the dollar could hold up, as markets will perceive the Fed as unwilling to be too aggressive in cutting interest rates.
On the other hand, news about US-China relations also played a role. US Treasury Secretary Scott Bessent said the US and China had reached a preliminary framework for a trade deal, including holding back the threat of 100% US tariffs on Chinese goods and suspending Beijing's export controls on rare earth minerals. This preliminary agreement will be carried over directly to the meeting between President Donald Trump and President Xi Jinping in South Korea on Thursday. This development could provide short-term support for the dollar as it is seen as reducing the risk of a full-blown trade conflict between the world's two largest economies.
Major currency pairs moved mixed. The US dollar weakened against the yen from its peak after previously breaking through the 153 per dollar area, as markets began to weigh the possibility of the Bank of Japan finally signaling a slightly tighter policy stance. At the same time, improving risk sentiment has led commodity currencies like the Australian dollar to strengthen against the US dollar, as Australia is highly sensitive to the Chinese economic outlook. In other words, the DXY's movement around 98 is again a reflection of two major stories: a (possibly) looser Fed, and (possibly) more subdued US-China tensions. (asd)
Source: Newsmaker.id
