NEW YORK (Reuters) – The U.S. dollar gained momentum on Monday following comments by Federal Reserve Chair Jerome Powell, who adopted a more cautious stance on the economic outlook. His remarks led traders to scale back expectations of another aggressive rate cut at the Fed’s upcoming meeting.
Powell highlighted that recent adjustments to key economic indicators, including growth, savings, and personal income, have alleviated some of the risks that had previously concerned the central bank.
He further noted that the Fed anticipates implementing two more interest rate reductions, totaling 50 basis points, by the end of the year provided economic conditions continue to evolve as expected. Powell warned, however, that it could take several years for inflation in housing services to decrease to desired levels.
“Powell’s tone suggests a more cautious approach,” said Steve Englander, head of Global G10 FX Research at Standard Chartered Bank’s New York branch. “The market may now be realizing that the Fed is serious about these adjustments.”
On September 18th, the Fed cut rates by 50 basis points, which Powell described as a “recalibration” in response to the significant drop in inflation over the past year. He added that while the economy remains strong, the Fed aims to stay ahead of potential softening in the labor market.
Market sentiment shifted slightly following Powell’s speech, with traders now pricing in a 35% chance of another 50-basis-point cut in November, down from 37% earlier on Monday and 53% last Friday, according to the CME Group’s FedWatch Tool.
The U.S. Dollar Index, which measures the greenback against a basket of currencies, rose 0.42% to 100.86. The euro dropped 0.34% to $1.1125, while the dollar surged 1.17% to 143.85 yen.
Powell’s remarks came ahead of a packed week of U.S. economic data releases, including the ISM Manufacturing Index on Tuesday and the non-manufacturing report on Thursday, as well as job openings data on Tuesday and September’s employment report on Friday.
“This week’s focus will be on the employment data,” said Marc Chandler, Chief Market Strategist at Bannockburn Global Forex in New York. Chandler noted that while the Fed is likely to pursue additional rate reductions, a drastic shift would only be warranted by unexpectedly poor labor market results such as fewer than 100,000 jobs added or a higher unemployment rate.
Analysts surveyed by Reuters project an increase of 140,000 jobs for September, with the unemployment rate expected to remain unchanged at 4.2%.
Meanwhile, Germany reported its lowest inflation rate since February 2021 on Monday, fueling expectations that the European Central Bank (ECB) may also consider easing. Major financial institutions, including Goldman Sachs and JPMorgan, have revised their forecasts and now anticipate a 25-basis-point rate cut at the ECB’s meeting on October 17th.
Elsewhere, the Australian and New Zealand dollars edged higher following China’s move to reduce interest rates and inject liquidity into its banking system last Friday. The Australian dollar, often viewed as a proxy for the Chinese yuan, rose 0.09% to $0.6908 after reaching a high of $0.69435, its strongest since February 2023.
The New Zealand dollar gained 0.03% to $0.6342, having earlier touched $0.63790, its highest level since July 2023.
In offshore trading, the Chinese yuan slipped 0.37% to 7.008 per dollar after hitting 6.9717 last Thursday, its strongest level since May 2023.
In the cryptocurrency market, Bitcoin dropped 3.73% to $63,355, continuing its recent volatile trend.
