Dollar Edges Up After Fed's Cautious Rate Cut

(RTTNews) - The six-currency Dollar Index, which measures the U.S. dollar's strength against a basket of 6 currencies, edged up during the week ended September 19 amidst a cautious rate cut by the Federal Reserve as well as status quo by Bank of England and Bank of Japan.

The U.S. dollar inter alia rallied against the British pound, the Australian dollar, the Japanese yen, and the Swedish krona. It however declined against the euro, the Swiss franc and the Canadian dollar.

The Dollar Index edged up 0.09 percent during the week ended September 19, rising to 97.64 from 97.55 a week earlier. The weekly trading range was much wider, as the Index which had touched a low of 96.22 on Wednesday climbed to a high of 97.81 on Friday.

The Federal Reserve, in a near-unanimous move on Wednesday, lowered the target range for the federal funds rate by quarter percentage point to 4-4.25 percent. The Federal Open Markets Committee cited the moderation in growth of economic activity in the first half of the year, the slowing job gains, the unemployment rate that has edged up but remains low, the inflation that has moved up and remains somewhat elevated, as well as the consequent shift in the balance of risks in support of its decision.

The Federal Reserve now expects the GDP growth in 2025 to record 1.6 percent versus 1.4 percent that it had projected in June. The unemployment rate projection of 4.5 percent and the PCE-inflation projection of 3 percent have however been retained.

In the Summary of Economic Projections made in June, the Fed had anticipated the median federal funds rate to fall to 3.9 percent in 2025. Now the Fed anticipates the same to fall to 3.6 percent, implying two more quarter-percentage rate cuts in 2025.

The Fed is also seen embarking on a firm pace of monetary easing going forward. It has now projected a lower median federal funds rate of 3.4 percent in 2026 versus the 3.6 percent it projected in June. Likewise, the median federal funds rate for 2027 is projected to be 3.1 percent versus the 3.4 projected in the previous quarter.

The greenback strengthened as markets perceived the Federal Reserve's widely expected rate cut as a risk management measure. Thursday's report by the U.S. Department of Labor which showed initial jobless claims falling by 33 thousand from the previous week to 231 thousand in the second week of September also supported the dollar. Markets had expected a far higher level of 240 thousand.

The dollar's weakness post the Fed rate cut lifted the EUR/USD pair from the week's low of 1.1716 on Monday to the week's high of 1.1919 on Wednesday. The euro's rally was however short-lived as the Dollar's rebound weakened the common currency. The pair added 0.10 percent during the week ended September 19, closing at 1.1746 on Friday, versus 1.1734 a week earlier.

Amidst persisting fiscal worries, the GBP/USD pair slipped 0.65 percent during the week ended September 19, dragging the sterling to $1.3470, from $1.3558 a week earlier. The week had witnessed Bank of England's widely expected pause on rates as well as data that revealed steady levels of unemployment and inflation as well as a larger-than-expected level of retail sales. During the week, the pair traded between the high of 1.3728 on Wednesday and the low of 1.3462 recorded on Friday.

The Australian Dollar dropped 0.84 percent against the U.S. Dollar during the week ended September 19 amidst the Dollar's resurgence as well as weak economic data from China. The pair traded between the high of 0.6708 recorded on Wednesday and the low of 0.6585 on Friday but eventually closed at 0.6594. The pair was at 0.6650 a week earlier.

The USD/JPY pair rallied 0.20 percent during the week ended September 19 as it closed at 147.97 versus 147.67 a week earlier. The pair ranged between the low of 145.48 on Wednesday and the high of 148.30 on Friday. The yen's moves against the greenback came in the backdrop of Bank of Japan's monetary policy review. The central bank of Japan on Friday held rates steady as widely expected. However, it indicated plans to start selling down its holdings of ETFs and REITs which sounded hawkish and limited the yen's decline.

After a week of central bank actions that mostly aligned with market expectations, the focus of currency markets has now shifted to key economic data as well as Fed comments due during the week.

The Dollar Index had edged down to 97.63 as markets wait for Fed Chair Powell's speech on Tuesday, the final update on second quarter GDP on Thursday as well as PCE-based inflation readings on Friday.

The Euro has increased to $1.1762 whereas the pound has increased to $1.3497. The AUD/USD pair has decreased to 0.6591 from 0.6594 on Friday. The USD/ JPY pair is currently at 147.95 versus 147.97 at close on Friday.