Dollar Suffers Biggest Weekly Loss in Three Months

The dollar index rebounded to 100.3 on Friday but remained down nearly 1.5% for the week, marking its worst weekly performance in three months and bringing its monthly decline to 1.3%. The greenback came under pressure as investors questioned whether the Federal Reserve is doing enough to bring inflation back to target. The Fed left the federal funds rate unchanged for a fifth consecutive meeting this week. While Chair Warsh reiterated the central bank's commitment to restoring price stability, he offered little guidance on the policy outlook for the remainder of the year. As a result, expectations for a rate hike at the September meeting eased, although markets continue to price in roughly a two-thirds probability of a 25bps increase.

The dollar index traded near 100 on Friday after sliding for three straight sessions and was on track to decline more than 1% for the week, pressured by the Federal Reserve’s cautious policy stance and a suspected Japanese currency intervention to support the yen. The greenback tumbled as much as 3.3% against the yen on Thursday as Tokyo was believed to have stepped into the foreign exchange market once again, while US Treasury Secretary Scott Bessent said the yen is “very undervalued” and argued that excessive currency volatility is unhealthy. Meanwhile, the Fed kept interest rates unchanged this week despite mounting inflationary risks stemming from renewed hostilities in the Middle East, although three FOMC members voted in favor of a rate hike. Markets are still pricing in about a 63% chance of a 25-basis-point Fed rate hike in September.

The dollar index extended its losses to around 100.3 on Thursday, its lowest level in about six weeks, after falling 0.6% in the previous session. Investors continued to assess the latest FOMC decision and Fed Chair Warsh's press conference. As expected, the Fed left the federal funds rate unchanged, although three FOMC members voted in favor of a rate hike. While Chair Warsh reiterated the Fed's commitment to bringing inflation under control and stressed that policymakers would not hesitate to act if necessary, he was not among those advocating an immediate increase and refrained from providing clear forward guidance. As a result, investors further scaled back expectations for an imminent rate hike and increasingly viewed the central bank as merely postponing what they see as an inevitable increase in borrowing costs. The implied probability of a 25-basis-point hike in September has fallen to around 55%, down from nearly 80% before the Fed's decision.