The dollar continued to rise against the euro and yen on Wednesday as the Federal Reserve kept interest rates on hold, citing solid economic growth and still high inflation, and gave little indication in its latest policy statement of when borrowing costs would fall again.
The euro fell 1% against the dollar to $1.19163, and rose 1.1% against the yen to 153.90 yen.
The dollar index, which gauges the strength of the U.S. currency against a basket of countries, rose 0.8% to 96.667. The index fell to 95.86 on Tuesday, its lowest since February 2022, after US President Donald Trump dismissed this month’s decline and encouraged dollar bears.
“The Fed did nothing, they acted on principle,” said Carl Schamotta, chief market strategist at payments firm Kopay in Toronto.
“By voting along a 10-2 line and subtly upgrading its assessment of labor market conditions, the central bank has clearly signaled its intention to remain on the sidelines for now,” he said.
A statement from the policy-setting Federal Open Market Committee gave no hint as to when further cuts to borrowing costs might occur, saying the “extent and timing of further adjustments” to policy rates would depend on future data and the economic outlook. “The good news for the market here is that the committee leadership shows no signs of bowing to Mr. Trump. They are taking a firm stand,” said Kyle Chapman, a foreign exchange market analyst at Ballinger Group in London.
“The path for interest rates this year is wide open, but I see no reason to cut them until at least the summer,” Chapman said. “The economy looks strong, stock prices are surging, and inflation is hovering in the 2.5-3.0% range. Why ease further now?”
bessent bump
The dollar rebounded in early trading after Treasury Secretary Scott Bessent reaffirmed the US’s strong preference for the dollar.
The US has a strong dollar policy and that means setting the right fundamentals.
Bessent said Wednesday, although he denied that the United States was intervening in foreign exchange markets to support the Japanese yen.
The dollar index has fallen nearly 2% this year after falling 9.4% last year.
Asked Tuesday whether he thought the dollar’s value had fallen too much, President Trump said the dollar’s value was “fantastic.” Traders took this as a signal to ramp up dollar selling ahead of the U.S. Federal Reserve’s policy decision later Wednesday.
“A USD retracement/rebound is quite logical given that Mr. Bessent has pushed back as hard as you can imagine about the idea that the Trump administration is trying to soften the USD and the Treasury is also trying to support the Yen to calm the market noise,” said Michael Brown, market analyst at online brokerage Pepperstone in London.
The dollar is under pressure from several factors, including expectations for continued Fed rate cuts, tariff uncertainty, policy instability, including threats to Fed independence, and rising fiscal deficits, all of which are undermining investor confidence in the stability of the U.S. economy.
On Tuesday, the euro topped $1.2 for the first time since 2021, the pound hit a 4-1/2-year high, while the yen is on track to post its strongest monthly performance against the dollar since April, buoyed by expectations of joint U.S.-Japan public intervention to support Japan’s currency.
ECB officials voice concerns
The recent weakness in the dollar may provide some respite for Japanese officials, but it is already a cause for concern in other countries. Two European Central Bank officials said on Wednesday that a stronger euro could affect monetary policy. Austrian central bank governor Martin Kocher told the Financial Times that the ECB may need to consider further rate cuts if the euro’s strength starts to affect the inflation outlook.
Bank of France Governor François Villeroy de Galhau said in a LinkedIn post that policymakers are “closely monitoring the strength of the euro and its potential impact on lower inflation.” The euro was last down 1.1% at $1.1907, not far from the previous session’s high of $1.2084 since June 2021.
(Additional reporting by Laura Matthews in New York, Amanda Cooper in London and Uncle Banerjee in Singapore; Editing by Sam Holmes, Aidan Lewis, Emelia Sithole-Matarise, Alexander Smith and Andrea Ricci)
