The United States dollar index surged to its strongest level in over three months last week as traders pared back expectations for further Federal Reserve rate cuts.
Hawkish remarks from several Fed officials reinforced the view that inflation remains too high to justify further easing, driving the U.S. Dollar Index (DXY) up 0.8% to its highest since July.
The DXY was buoyed by Federal Reserve Chair Jerome Powell’s measured tone following the central bank’s widely expected quarter-point rate cut to a range of 3.75% - 4.00%.
Powell cautioned that the policy outlook remains uncertain and warned markets not to assume another cut in December.
At the same time, Treasury yields climbed to multi-week highs as investors adjusted to the Fed’s more cautious stance. The central bank also announced small-scale Treasury purchases to ease recent liquidity strains, signalling that financial conditions had tightened more than policymakers anticipated.
Among Fed officials, Kansas City’s Jeffrey Schmid and Dallas Fed President Lorie Logan both voted against the latest rate cut, citing persistent inflation and resilient labour markets.
Cleveland Fed President Beth Hammack echoed similar concerns, while Atlanta’s Raphael Bostic struck a more balanced tone, noting that “every meeting is live”.
Lingering political risks in Washington, including the threat of a prolonged government shutdown, kept some investors on edge, while geopolitical developments such as the Russia - Ukraine conflict and speculation of a Trump - Putin summit remained largely in the background.
Euro slips to 3mth low as policy gap widens
The euro extended its decline last week, with EUR/USD sliding to a three-month low near 1.1523 as the Fed’s hawkish message fuelled renewed dollar strength.
While the Fed struck a cautious tone, the European Central Bank (ECB) opted to keep rates unchanged for a third consecutive meeting, arguing that inflation remains near its 2% target and the eurozone economy continues to expand modestly.
The ECB reaffirmed its data-dependent stance, maintaining flexibility in future policy decisions.
The growing policy divergence between the Fed’s “hawkish cut” and the ECB’s steady approach has widened the gap in rate expectations, leaving the euro vulnerable heading into November’s data releases.
Aussie softens amid hot inflation
The Australian dollar weakened to around 0.6540 as the U.S. dollar’s broad rally overshadowed domestic inflation data.
The pair slipped 0.2% on Friday, with investors trimming RBA rate-cut bets following a hotter-than-expected inflation print.
Australia’s Q3 CPI and producer price index (PPI) both surprised to the upside, with producer prices rising 1% in the September quarter versus forecasts of 0.8%.
The stronger data prompted markets to scale back expectations for an RBA rate cut this year.
According to the ASX RBA Rate Tracker, odds of a 25-basis-point cut at Tuesday’s policy meeting have fallen sharply to 7%, down from 62% a week earlier.
The Aussie may find some support from optimism following the US - China trade deal last week - a development that could benefit Australia’s export-driven economy.
Sterling sinks to 7mth low as fiscal strains mount
The British pound extended losses to a seven-month low near 1.3097, pressured by both the strong U.S. dollar and growing fiscal concerns at home. Investors remained sceptical about the UK’s economic outlook ahead of Chancellor Rachel Reeves’ November budget.
The Office for Budget Responsibility (OBR) projects a 0.3% decline in productivity, which could expand the deficit by £21 billion by 2030.
Meanwhile, the Institute for Fiscal Studies (IFS) warned of a £22 billion shortfall, suggesting Reeves may face a difficult choice between raising taxes or borrowing more - both politically sensitive options.
On the monetary front, hawkish commentary from Fed officials further weighed on sterling. Cleveland Fed President Beth Hammack reiterated that inflation remains too high to justify easing, reinforcing the U.S. dollar’s advantage.
Yen steady at multimonth lows, Tokyo warns of FX risks
The Japanese yen steadied near multi-month lows around 154.00 per dollar, holding close to its weakest level since early March.
The pair paused its recent climb after Japan’s new Finance Minister, Satsuki Katayama, warned that the government is “closely monitoring FX with a high sense of urgency”, hinting at possible intervention.
The comments provided modest support to the yen after USD/JPY hit an eight-and-a-half-month high early last week.
The broader dollar strength remains underpinned by rising Treasury yields and reduced Fed easing expectations, keeping pressure on the yen.
Economic Calendar Week Ahead:
On Monday, Japan will be closed for Culture Day, keeping Asia trading light to start the week. Data releases include Australian building permits and household spending, while South Korea and the eurozone publish manufacturing PMI figures.
China’s RatingDog manufacturing PMI is also due, offering a key gauge of industrial momentum. The UK will release its final S&P Global manufacturing PMI, providing the first economic snapshot of the week for sterling traders.
On Tuesday, attention will turn to Australia, where the Reserve Bank of Australia (RBA) will announce its interest rate decision, followed by a press conference. With inflation running hotter than expected, markets are watching closely for any shift in tone from Governor Michele Bullock.
In North America, Canada will post its manufacturing PMI, while in the US, ISM manufacturing data and speeches from Fed officials Mary Daly, Lisa Cook, and Michelle Bowman will shape expectations for December policy.
South Korea’s inflation report is also scheduled, which could influence won movements.
On Wednesday, the midweek session brings a heavy slate of economic data. In the U.S., balance of trade figures, factory orders, and JOLTs job openings will provide a detailed look at domestic demand and labour conditions.
New Zealand will publish its unemployment rate, while Japan releases the Bank of Japan’s monetary policy meeting minutes. Europe’s focus will be on producer price inflation, with results likely to influence ECB rate expectations.
On Thursday, the Bank of Canada will hand down its policy decision, while in the U.S., the ADP employment change and ISM services PMI will serve as key precursors to Friday’s non-farm payrolls.
Australia will publish its trade balance data, which may confirm resilience in export activity. Europe’s retail sales figures will test consumption strength, while the Bank of England will deliver its interest rate decision as fiscal concerns weigh on the pound.
On Friday, a flurry of high-impact data is set to close out the week. In the U.S., traders will parse weekly jobless claims, wholesale inventories, and speeches from a string of Fed officials, including Vice Chair Philip Jefferson and New York Fed President John Williams.
Japan will issue household spending data, while China’s trade figures will shed light on import and export trends.
The UK’s Halifax house price index will offer an update on property conditions ahead of the weekend.
The weekend also brings crucial labour market data from North America and inflation figures from China. The U.S. will release non-farm payrolls, unemployment, and average hourly earnings alongside the preliminary University of Michigan consumer sentiment survey, all key metrics for the Fed’s December decision.
Canada will report employment and wage growth figures, while China rounds out the week with its consumer and producer price indexes, which will guide expectations for further stimulus from Beijing.
