DXY Slides After Fed Chair Powell Speech

The dollar index edged slightly lower below 98 on Friday but remained close to the two-week highs reached earlier in the week and was on track to end the first week of February up nearly 0.9%. The greenback drew support from its safe-haven appeal throughout the week, particularly on Thursday, when weaker-than-expected US labour data raised concerns about the health of the economy and, alongside a tech sell-off and a sharp decline in crypto assets, triggered a flight to safety. Sentiment improved on Friday amid a rebound in tech stocks and preliminary data showing that the University of Michigan consumer sentiment index unexpectedly climbed to a six-month high. Looking ahead, investors will turn their attention to the delayed US jobs report and the CPI release next week for further clues on the Fed’s outlook. Markets are currently pricing in around 58bps of Fed rate cuts this year, up from about 50bps earlier in the week. The dollar weakened mainly against the pound and the Aussie.

The dollar index traded just below 98 on Friday, staying near a two-week high as a broad selloff in stocks, commodities, and cryptocurrencies boosted demand for the currency. The greenback has gained sharply since President Donald Trump nominated Kevin Warsh as the next Federal Reserve chair, given Warsh’s preference for a smaller balance sheet and a more cautious approach to policy easing. The nomination also eased concerns about the Fed’s independence. Meanwhile, a series of US jobs data this week pointed to signs of a slowing labor market, supporting dovish bets on Fed policy. Markets currently price in two rate cuts this year, with the first expected in June and a second potentially in September. The dollar held gains against the euro and sterling after the ECB and BOE kept policy rates unchanged, but strengthened the most against the yen ahead of Japan’s lower house elections.

The dollar index swung between small gains and losses to trade around 97.9 on Thursday, as renewed concerns over the health of the US economy, the labour market, and elevated AI valuations weighed on sentiment. Fresh data showed job openings unexpectedly fell to 2020-lows, job cuts were the highest for a January month since 2009, and initial jobless claims rose to 231K, the highest in two months and well above forecasts of 212K. Adding to the cautious tone, the ADP report showed private-sector job growth fell well short of expectations. The string of weaker labour data reinforced bets on Federal Reserve rate cuts, with markets still pricing in a first reduction in June and a second potentially in September. Meanwhile, both the ECB and the Bank of England left interest rates unchanged, as expected. The dollar rose sharply against the British pound, as traders interpreted the BoE’s tone as more dovish. The greenback was little changed versus the euro but weakened against the Swiss franc.