Fed Cuts, Mixed Messaging, and Why It Matters
The Fed delivered its expected rate cut this week, but the real damage to the dollar came from the messaging. Chair Powell struck a less hawkish tone than some had positioned for, reinforcing the idea that policy is no longer restrictive enough to keep the dollar bid on rallies. Lower expected policy rates reduce the return advantage on U.S. assets, and that’s been a steady headwind for the index.
Uncertainty around the 2026 rate path is keeping sellers engaged. Traders are pricing two cuts next year, while Fed projections point to fewer, creating an ongoing tug-of-war that’s capping any meaningful dollar rebound. Political noise around Fed leadership and pressure for easier policy is adding another layer of discomfort, even if it’s not yet fully priced.
Foreign Currencies Keep the Pressure On
Cross-currency flows haven’t helped the greenback. The euro held near recent highs, while sterling eased only modestly despite weak UK GDP data, leaving both currencies on track for another weekly gain versus the dollar.
The yen remains a wild card, with USD/JPY ticking higher ahead of the Bank of Japan meeting, but expectations for further BOJ hikes continue to limit dollar upside on that front.
Bottom line: foreign currencies aren’t breaking down, and that keeps dollar rallies shallow.
Yields Bounce, Risk Still Cautious
Treasury yields rebounded Friday after a two-day slide, with the 10-year jumping back above 4.19% as Goolsbee urged caution on cutting too fast. Higher long-end yields can support the dollar by lifting relative returns, but the mixed move across the curve suggests bond traders aren’t fully sold on a sustained hawkish turn.
