The US dollar remained weak on Thursday, trading near its lowest level in four years amid economic and political uncertainty after the Federal Reserve kept interest rates unchanged.
At 11:30 a.m. Saudi time, the dollar index, which tracks the performance of the US currency against a basket of six other currencies, fell by 0.2% to 96.080, continuing its decline after a period of heavy selling.
The dollar stabilizes near its lowest level in four years.
The dollar was somewhat stable on Wednesday after the Federal Reserve kept interest rates unchanged at 3.75% as widely expected, with Chairman Powell stating that the U.S. economy remained strong with low risks to both inflation and employment.
Traders interpreted this optimistic tone as a sign that interest rates may remain steady for at least a few months, which helped provide some support to the currency, which had appeared to be on the verge of collapse earlier in the week.
Brian Story, head of multi-asset strategies at Brinker Capital, said: “Overall, the Fed took a more positive tone on the economy, with minor changes to the Federal Open Market Committee statement that modestly strengthened the committee’s view of the labor market and showed less concern about inflationary pressures.”
Although the Federal Reserve did not update its 'point chart' at this meeting, it is noteworthy that there appears to be a healthy degree of alignment between the Fed and the financial markets (thanks to Fed interest rate futures) regarding the likelihood of a 1-2 quarter point interest rate cut by the end of the year.
The dollar fell this week to its lowest level since 2022, having already declined by about 2% since the beginning of the year, amid concerns about US President Donald Trump’s inconsistent policies and the independence of the central bank, as well as indications that the United States was prepared to engage in a coordinated intervention to bolster the Japanese yen at the expense of the US dollar.
Concerns were raised about the Federal Reserve's independence after the Trump administration opened a criminal investigation against Powell over a long-term renovation of the central bank's buildings - an investigation Powell said was politically motivated.
Powell declined to answer questions on the subject at the press conference following the meeting.
The euro falls back below $1.20
In Europe, the EUR/USD pair rose 0.2% to 1.1971, supported by a weaker dollar, although the pair fell back below 1.20 after breaking through that key resistance level earlier in the week.
The strength of the single currency has led European Central Bank policymakers to express growing concerns about the potential impact of this on inflation in the region, and therefore on monetary policy.
Analysts at ING said in a note: “Currently, nothing is emerging from the ECB’s pricing. We believe markets will await any clarification on this point from Lagarde at next Thursday’s meeting before adopting this narrative.”
Another move above 1.20 today could lead to further bullish volatility, with a possible test of Monday's high of 1.208. Alternatively, we would need to see a significant break below 1.190 before we can conclude that the tide is turning on the pair.
The pound/dollar pair rose 0.1% to 1.3817, just below levels last seen in October 2021 in the previous session, while the dollar/Swedish krona pair rose 0.2% to 8.8460 after the Swedish central bank kept its interest rate unchanged at 1.75% for the fourth consecutive month.
ING added: The Swedish central bank has been clear that only significant data deviations and/or serious external events could trigger near-term interest rate adjustments. While the strength of the euro is already causing some protests in Frankfurt, the Swedish central bank maintains its long-standing view that the Swedish krona is significantly undervalued.
The yen holds onto its recent gains
In Asia, the dollar/yen pair fell 0.1% to 153.27, with the Japanese yen holding onto its recent gains as markets speculated about a new intervention to support the currency.
The pair remained near its lowest level in three months after Prime Minister Sanae Takaichi warned of excessive volatility in the yen.
Reports also indicated that US and Japanese officials were considering a joint intervention to support the yen, making investors wary of betting against the Japanese currency.
Elsewhere, the dollar/Chinese yuan pair remained virtually unchanged at 6.9462, near its lowest level since May 2023, while the Australian dollar/US dollar pair rose 0.5% to 0.7069, reaching its highest level in nearly three years.
The Australian dollar remained strong after higher-than-expected Australian inflation data reinforced bets that an interest rate hike by the Reserve Bank was imminent.
