The US dollar rose slightly on Wednesday, recovering from its lowest level in nearly a week, after Federal Reserve Chair Jerome Powell struck a cautious tone regarding further monetary easing, even as markets continue to price in two additional rate cuts this year.
The euro, meanwhile, remained broadly steady despite data showing an unexpected decline in German business confidence in September, as the Ifo Business Climate Index fell to 87.7 from 88.9 in August amid weak economic expectations. The euro last traded down 0.4% at $1.177, though it was little changed against other currencies such as the British pound and Swiss franc, reflecting investor demand for the dollar. Sterling fell 0.3% to $1.34820.
Rate Cuts Under the Microscope
Market focus is now firmly on expectations for two quarter-point rate cuts at the Fed’s remaining meetings this year, along with another reduction anticipated in the first quarter of 2026, in line with the central bank’s guidance after last week’s policy meeting.
US data this week will be key, particularly Friday’s release of the Personal Consumption Expenditures (PCE) index, the Fed’s preferred inflation gauge, which will be critical in shaping expectations for the next steps in monetary policy.
Francesco Pesole, FX strategist at ING, said: “We still see the risks tilted toward a weaker dollar with Friday’s core PCE reading. A monthly print of 0.2% would reinforce expectations for two rate cuts this year, unless the geopolitical picture in Europe deteriorates.” He added that dollar moves have been limited given Powell essentially repeated the same cautious stance he laid out last week.
At that time, the dollar rebounded from its lowest level since early 2022 after the Fed’s policy announcement and Powell’s press conference, which turned out to be less dovish than markets had anticipated following a sharp deterioration in labor market data.
US Dollar Index Adds 0.35%
The dollar index, which tracks the currency against six major peers, rose 0.35% on Wednesday to 97.575, attempting to claw back losses after two straight sessions of declines. It had touched 97.198 in overnight trading, its lowest level since Thursday.
James Knifton, senior corporate FX dealer at Convera, said: “Powell acknowledged there are no risk-free policy options, warning that premature easing could entrench inflation, while excessive tightening could unnecessarily harm job prospects.”
Against the Japanese yen, the dollar rose 0.29% to 148.065 yen.
Candidates for the leadership of Japan’s ruling Liberal Democratic Party answered questions from reporters on Wednesday. Frontrunner Sanae Takaichi, known for her accommodative monetary stance, said policy is the responsibility of the Bank of Japan but cautioned that rate hikes could weigh on mortgages and corporate investment.
Asian Markets: Australian and New Zealand Dollars
The Australian dollar rose 0.23% to $0.66140, reversing earlier minor losses, after consumer price inflation accelerated to 3% in August from 2.8% in July, beating the 2.9% consensus forecast, less than a week before the Reserve Bank of Australia’s next policy meeting.
However, the picture was complicated as a key measure of core inflation slipped to 2.6%. Traders slightly trimmed bets on a rate cut by year-end to around 33%, according to LSEG data, while markets still expect no change at the September 30 meeting.
Data suggest persistently high prices may constrain the RBA’s ability to cut rates to support a weak labor market, though the inflation jump largely reflects the expiry of energy subsidies and may not be as negative as it appears, said Kyle Rodda, analyst at Capital.com.
The New Zealand dollar was steady at $0.5851 after the appointment of a new central bank governor. Finance Minister Nicola Willis announced on Wednesday that Swedish central banker Anna Breman will take over as governor of the Reserve Bank of New Zealand on December 1, becoming the first woman to hold the post.
