Dollar decline stops as Fed shits into cautious policy mode 

On Thursday, the U.S. dollar index stabilized around 103.8, maintaining its position after rising for two straight sessions, driven by stronger-than-expected data that leading traders to reconsider their outlook on Federal Reserve monetary policy. Trading volume in the dollar, however, is expected to remain subdued due to holidays in both Japan and the United States. 

Despite the recent uptick, the DXY index has shed close to 0.7% over the past five days, touching notable lows in Monday trading. 

Wednesday's data revealed a larger-than-anticipated decrease in the number of Americans filing new claims for unemployment benefits, contributing to the positive sentiment. There was also an uptick in inflation expectations for both the short and long term, heightening concerns about the possibility of prolonged higher interest rates.  

The recent minutes from the Federal Open Market Committee (FOMC), released on Tuesday, further fueled upward momentum, indicating that policymakers favored maintaining a restrictive monetary policy and offered no indications of an imminent rate reduction. 

"Participants noted that further tightening of monetary policy would be appropriate if incoming information indicated that progress toward the Committee's inflation objective was insufficient," the minutes read — a statement that indicated it will take an unexpected shock of some degree to prompt a further rate increase. 

While the markets continue to predict that the Fed will keep rates unchanged in December, traders have scaled back expectations for rate cuts in March. 

US interest rates: Rabobank sees Fed to remain on hold until the middle of next year

In a note following the release of FOMC minutes on Tuesday, economists at Rabobank wrote that recent data would not spur the Federal Reserve into action: 

“The minutes of the FOMC meeting on October 31-November 1 confirm the Committee’s data dependence and intention to proceed carefully. 

We should not attach too much value anymore to the remaining hike that is implied in the September dot plot. What’s more, the recent decline in yields has partially been caused by softer economic and inflation data, so the urgency of an additional hike does not seem large.  

Since the FOMC believes that a soft landing is in sight, it would be foolish to risk it by hiking further than necessary. If we were to see stronger economic and inflation data before the December meeting, longer-term rates are likely to rebound and substitute for a rate hike. Therefore we do not expect further hikes. 

We expect the Fed to remain on hold until the middle of next year. By then we expect the FOMC to be ready to cut rates as rising unemployment (note that unemployment has quietly risen from 3.4% to 3.9% this year), most likely accompanied by a recession, will give the Committee confidence that inflation is on the right path.” 
 

USD forecast: ING sees DXY at around 104 headed into the weekend 

In a dollar forecast issued on Thursday, Francesco Pesole, an FX Strategist at Dutch bank ING, wrote that the dollar index will likely stabilise around the 104 mark heading into the weekend: 

“Today, FX flows will be subdued due to the Thanksgiving holiday. Equity and bond markets are closed, and there are no data releases in the US. Part of the rebound in the dollar observed over the past two sessions (especially on Tuesday) may well be related to some profit-taking on risk-on trades and more defensive positioning ahead of Thanksgiving. 

We think DXY can find some stabilisation around 104.00 into the weekend amid thinner trading volumes and a lack of market-moving data releases in the US.” 

At the time of writing, the DXY index was close to 0.30% down the day, trading around the 103.62 area, as per MarketWatch data. The euro to dollar exchange rate was up 0.24% at $1.0917, while the pound to dollar rate saw sterling gain 0.40% against the greenback, with GBPUSD trading at $1.2545.