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Over the past week, the US dollar experienced a slight decline, marking the end of five consecutive weeks of gains. This shift comes after a strong rebound at the beginning of the year, and it reflects a decrease in the upward momentum of the US dollar in the short term. The hawkish adjustment of Federal Reserve policy expectations has been a key factor in the dollar's recent performance.
USD Index 4H
The US rate market has adjusted its expectations, anticipating later and less substantial rate cuts by the Fed throughout the year. The first expected rate cut has been pushed back to June, aligning more closely with the Fed's own plan for three cuts by the end of the year. This adjustment is influenced by positive US economic data, creating doubts about the necessity of immediate Fed rate cuts. New York Fed President Williams reassured that the recent strong economic data hasn't significantly altered his overall view of the economy.
Williams mentioned that the Fed anticipates some "bumpy" disinflation month to month but sees underlying inflation moving in the right direction. He dispelled concerns of a substantial hawkish shift from the Fed now. In comparison, other Fed officials like Vice Chair Jefferson and Governor Waller expressed a more cautious stance, with Waller wanting to verify the strength of January data over the next few months.
While last week's comments still indicate the Fed's inclination towards lowering rates, the timing for the first cut now seems less likely before June.
The recent loss of upward momentum in the US dollar may suggest reduced investor worries about global growth outside the US. European PMI surveys from last week cautiously indicate an uptick in service sector activity. Additionally, policy measures in China, including fiscal support for equipment renewals and consumer goods trade-ins, have boosted sentiment in China's economy and equity market.
President Xi's announcement of using fiscal policy to support economic recovery further encourages speculation about additional fiscal stimulus after next month’s 14th National People’s Congress. Despite these positive developments, Asian currencies have not yet experienced a significant reversal of weakness seen at the beginning of the year.
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