Fed Rate Cut Spurs Dollar Rally to Two-Year High, Signaling Slower Easing Pace
NEW YORK – The US dollar surged to a two-year high against major currencies on Wednesday, following the Federal Reserve’s widely anticipated interest rate cut. The move, while expected, was accompanied by signals that the central bank would likely slow the pace of its monetary easing cycle in the coming year, bolstering the dollar’s appeal. The Fed lowered its benchmark policy rate by 25 basis points, bringing it to a target range of 4.25% to 4.50%. However, officials indicated their intent to pause further rate cuts next year, citing a stable labor market and controlled inflation.
This more hawkish-than-expected stance prompted a reassessment of future rate cuts by the market, pushing up US Treasury yields and strengthening the dollar. The yield on the benchmark 10-year Treasury note rose to a four-week high of 4.446%. Market participants interpreted the Fed’s outlook as a signal of confidence in the US economy, further supporting the dollar’s rise. Analysts noted the upward revision of the Fed’s core inflation forecast and adjustments to its "dot plot," which projects future rate moves, as key drivers of the dollar’s strength.
The impact of the Fed’s decision reverberated across the currency market. The dollar appreciated notably against the Swiss franc, reaching its highest level since July. The euro also weakened considerably against the greenback, falling to a three-week low. The dollar index, a gauge of the dollar’s strength against a basket of six major currencies, climbed to its highest level since November 2022, reflecting the broad-based nature of the dollar’s rally.
Fed Chair Jerome Powell, in his post-meeting press conference, emphasized the importance of a cautious approach moving forward, focusing on tangible progress in curbing inflation. He acknowledged a softening labor market but maintained a positive outlook overall. The combination of the rate cut and Powell’s comments fueled the dollar’s surge, with the greenback hitting multi-year highs against several currencies, including a 15-1/2-year high against the South Korean won.
The dollar also gained ground against the Japanese yen, as the Bank of Japan is expected to maintain its ultra-loose monetary policy. Similarly, the Bank of England is anticipated to hold rates steady, further contrasting with the Fed’s slightly more hawkish stance. Sterling weakened against both the euro and the dollar in the aftermath of the Fed’s announcement. Meanwhile, the Norwegian crown and Swedish crown depreciated against the dollar, despite expectations of differing monetary policy decisions from their respective central banks.
The Australian and New Zealand dollars also suffered losses against the surging greenback, reaching multi-month lows. Emerging market currencies, such as the Chinese yuan, remained under pressure, hovering near a 13-month low against the dollar. Bitcoin, the largest cryptocurrency, experienced a sharp decline after Powell reiterated the Fed’s reluctance to become involved in any government initiatives related to cryptocurrencies. The cryptocurrency market remains sensitive to regulatory developments and macroeconomic trends, particularly those emanating from the US Federal Reserve.
