Dollar Rises as Fed Outlook Mulled

The dollar index slipped to around 97.5 on Thursday, extending losses for a second consecutive session as uncertainty over US tariffs dampened confidence in the reserve currency. On Wednesday, US Trade Representative Jamieson Greer announced that the US tariff rate for certain countries could rise to 15% or higher from the recently implemented 10%, without providing further specifics. President Donald Trump offered relatively muted tariff commentary in his State of the Union address but signaled no intention to alter his approach, even after the Supreme Court struck down his broad reciprocal tariffs. On monetary policy, the Federal Reserve is widely expected to maintain interest rates at current levels next month. Meanwhile, US and Iranian negotiators are scheduled for the latest round of nuclear talks in Geneva later today, adding to the market’s cautious tone. Externally, the dollar eased against the yen amid speculation that the Bank of Japan may deliver a near-term rate hike.

The dollar index rose to the 99 mark on Wednesday, its highest in one month, as global markets downplayed concerns of uncertain economic policy by the White House to maintain their exposure to dollar-denominated assets. President Trump raised his fresh section 122 tariffs to 10%, despite the latter threats of raising them to 15%, after the Supreme Court struck down the series of country-targeting tariffs that were passed under IEEPA 10 months ago. Concerns that the White House would push for higher levies were also tame as tariff rhetoric was relatively muted in the President's State of the Union speech, while Congress is unlikely to extend the measures past this fourth quarter. In the meantime, the supply of dollars in the financial system may rise to a softer magnitude due to incoming Federal Reserve Chairman Kevin Warsh's preference on a small Fed balance sheet. Also, concerns of sticky inflation drove rate traders to push back bets of its next rate cut to September.

The dollar index slipped below 97.8 on Wednesday, giving back some of the previous session’s gains after President Donald Trump offered no indication of altering his tariff policies in his State of the Union address. Trump expressed confidence that foreign countries would honor their trade agreements and suggested that tariffs could eventually replace income taxes. The US began implementing a temporary 10% global tariff on Tuesday, which the White House is reportedly aiming to raise to 15%, following the Supreme Court’s decision to strike down Trump’s reciprocal tariffs. On the monetary policy front, Susan Collins stated that holding interest rates steady is likely appropriate amid an improving labor market and persistent inflation risks, while Thomas Barkin added that policy is well-positioned to manage economic risks. Nevertheless, markets continue to price in roughly three 25-basis-point rate cuts from the Fed this year.