The United States dollar index (DXY) extended its decline for a second consecutive week, pressured by a cautious Federal Reserve stance and persistent political noise, even as rate markets attempted to stabilise following fresh signals on central bank leadership and inflation dynamics.
While the Greenback managed to recover from its worst levels after the latest Federal Open Market Committee (FOMC) meeting, broader sentiment towards the currency remains fragile.
The DXY slid towards the 95.23 region during the week, a level last seen in early 2022, before paring losses.
The rebound followed the Fed’s decision to leave interest rates unchanged and President Donald Trump’s nomination of Kevin Warsh as successor to Jerome Powell, developments that temporarily steadied U.S. yields and the currency.
Meanwhile, the Fed held benchmark rates steady in the 3.50%–3.75% range, in line with expectations last week.
Chair Jerome Powell described the current stance as appropriate, pointing to labour market stabilisation and gradual progress on services inflation. He stressed that policy decisions would remain meeting by meeting and that rate hikes are not the base case.
However, officials acknowledged that inflation remains above the 2% target and that tariff-related price pressures continue to cloud the outlook.
Fed commentary remained split, as some policymakers signalled greater comfort with the disinflation trend, while others warned that delaying action on a softening labour market could prove costly.
Markets continue to lean towards eventual rate cuts, but the path is uncertain, particularly as producer price data suggest upstream inflation pressures remain firm.
Euro policy divergence returns
The EUR/USD currency pair retreated as renewed U.S. yield support and policy repricing boosted the U.S. dollar.
The pair slipped back towards the 1.19 area after failing to sustain gains, despite firmer-than-expected growth data from Germany and the wider Eurozone.
The nomination of Kevin Warsh, viewed by markets as relatively hawkish and institutionally credible, helped lift U.S. Treasury yields, narrowing rate differentials that had previously favoured the euro.
European data, including improved GDP readings and a modest uptick in German inflation, failed to offset the shift in U.S. rate expectations.
Attention now turns to upcoming euro area PMIs and the European Central Bank meeting, which could inject fresh volatility into the pair.
Aussie pulls back after highs
The AUD/USD currency pair corrected lower after reaching a three-year high, as profit-taking and a modest U.S. dollar recovery weighed.
The pair slipped back towards the 0.70 handle last Friday after a strong multi-day rally.
Australian producer price figures showed inflation holding steady at 3.5% YoY in the fourth quarter, signalling no renewed acceleration in upstream price pressures.
Nonetheless, the Aussie retains underlying support after earlier consumer inflation data strengthened expectations that the Reserve Bank of Australia may need to tighten policy further.
Markets are pricing a 67% probability of a 25-basis-point RBA hike at the next meeting, with the policy rate seen rising further in coming months, according to the ASX's RBA Rate Tracker.
Even so, short-term moves remain sensitive to U.S. dollar swings and global risk sentiment.
Sterling tracks USD strength
Sterling drifted lower against the U.S. dollar, with the GBP/USD pair slipping back below the 1.38 level as stronger U.S. inflation data and the Warsh nomination supported the Greenback.
The UK calendar was relatively light last week, leaving the Pound driven largely by external factors.
Focus now shifts to the Bank of England meeting. While rates are expected to remain unchanged, guidance on the policy outlook will be key as markets weigh the balance between slowing growth and still-elevated inflation.
Yen's yield gap supports USD
The USD/JPY currency pair rebounded strongly, climbing back towards the mid-150s as U.S. yields firmed and the Dollar regained traction.
The move reflected widening policy divergence between the Fed and the Bank of Japan.
Firmer U.S. inflation data and perceptions of a more orthodox Fed leadership path under Warsh helped push Treasury yields higher.
In Japan, meanwhile, softer inflation readings and weaker activity indicators reinforced expectations that the Bank of Japan (BoJ) can afford to proceed cautiously with any further tightening.
The contrast in policy trajectories continues to favour the U.S. dollar against the Yen, particularly during periods of rising U.S. yields.
Economic Calendar Week Ahead
On Monday, markets will monitor Australian dwelling price data and final manufacturing PMIs across Australia, Japan, South Korea, China, the UK and the euro area, alongside the Bank of Japan’s summary of opinions.
Tuesday brings U.S. and Canadian manufacturing PMIs and the ISM manufacturing index, while Australia releases building permits and holds its RBA policy decision and press conference. South Korea publishes inflation data.
On Wednesday, U.S. JOLTs job openings and speeches from Fed officials are due, while New Zealand labour market data and euro area inflation and PPI figures are released. Services PMIs are also scheduled across several major economies.
Thursday features U.S. ADP employment data, ISM services, and further Fed commentary. The UK construction PMI and the Bank of England rate decision will be closely watched, alongside euro area retail sales and Australian trade data.
Friday sees the European Central Bank policy decision, U.S. initial jobless claims and additional Fed balance sheet data, while Japan and the UK publish household and housing indicators.
The week will conclude with key U.S. labour market data, including nonfarm payrolls, unemployment and wage growth figures, alongside Canadian employment data, setting the tone for the U.S. dollar’s next major move.
