Dollar Strengthens on Hawkish Fed Signals

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.

The dollar index strengthened above 97.5 on Thursday, scaling a near two-week high, as markets priced in a slower pace for potential Federal Reserve rate cuts. Fed Governor Lisa Cook emphasized concerns over stalled inflation progress rather than a cooling labor market, suggesting she would not support a rate cut until price pressures ease. Investors also considered the implications of Kevin Warsh’s nomination as Fed chair, noting his preference for a smaller Fed balance sheet and expectations that he would be less aggressive on rate reductions. On the data front, the ADP report showed private employment growth fell well below expectations, while services activity exceeded forecasts. Attention also turned to upcoming ECB and BOE policy meetings, which are both expected to hold rates steady. Meanwhile, Japan’s lower house election this weekend continued to weigh on the yen amid bets on fiscal expansion.