The US Dollar Index (DXY) is heading for its steepest weekly loss in three months, falling to approximately 100.3 on Thursday, marking its lowest level in about six weeks. This downturn follows Wednesday's Federal Open Market Committee (FOMC) decision to keep the federal funds rate unchanged, despite three members advocating for a rate hike. Federal Reserve Chair Kevin Warsh's press conference, which emphasized a commitment to inflation control but lacked clear forward guidance and immediate hike advocacy, led investors to scale back expectations for an imminent rate increase. The implied probability of a 25-basis-point hike in September has dropped from nearly 80% before the Fed's decision to around 55%.
Analysts at ING noted that the market interpreted Warsh's remarks as the Fed outsourcing monetary tightening to markets, reducing the perceived need for policy rate increases. Brown Brothers Harriman's Elias Haddad also highlighted that Warsh's tough inflation rhetoric failed to convince markets, leading to a steepening US yield curve with lower front-end rate expectations and higher long-end inflation expectations. Political pressure also played a role, with US President Donald Trump reportedly urging Chairman Warsh via indirect channels to lower interest rates.
Adding to the dollar's woes, it tumbled as much as 3.3% against the yen on Thursday due to a suspected Japanese currency intervention to support its currency. US Treasury Secretary Scott Bessent commented that the yen is "very undervalued" and excessive currency volatility is unhealthy. Despite increasing inflationary risks, notably from renewed Middle East hostilities and volatile crude oil prices, which keep the core US PCE well above the Fed's 2% target, the Fed's cautious stance and perceived reluctance to hike rates have pressured the dollar.
