Dollar Tumbled Last Week As Powell Spotlights Rate Cut

A categorically dovish shift in the Fed Chair Jerome Powell’s monetary policy hints exacerbated the Dollar’s plunge against major currencies during the week ended August 23. The U.S. Dollar plummeted against the euro, the British pound, the Australian dollar, the Japanese yen, the Canadian dollar, the Swiss franc as well as the Swedish krona during the week ended August 23, 2024. The Dollar Index also recorded heavy losses.

Jerome Powell, in his speech at the Jackson Hole economic symposium on Friday acknowledged that the time had come for policy to adjust, triggering a massive decline in the greenback’s fortunes.

The Dollar Index, a measure of the Dollar’s strength against a basket of 6 currencies dropped 1.7 percent during the week ended August 23. From the level of 102.40 recorded at close on August 16, the index descended steadily, to close at 100.68. The Index recorded the week’s high of 102.48 on Monday and the week’s low of 100.60 on Friday.

In his Jackson Hole speech, Jerome Powell also indicated that the Fed’s focus has shifted to the downside risks to employment rather than inflation. The shift in focus for the Fed which has a dual mandate of maximum employment and stable prices came amidst a large downgrade to the labor market data. The Bureau of Labor Statistics had on Wednesday revised down the non-farm payrolls for the year ended March 2024 by more than 800 thousand after contrasting it with the Quarterly Census of Employment and Wages. The weakness in the labor market, which is seen as increasing the headroom available to the Fed to ease rates also dampened the dollar.

Minutes of the July FOMC released on Wednesday also contributed to the dollar’s weakness. According to the minutes, the vast majority observed that if the data continued to come in about as expected, it would likely be appropriate to ease policy at the next meeting which was scheduled for September. The participants also viewed the incoming data as enhancing their confidence that inflation was moving toward the Committee’s objective. The FOMC participants also acknowledged that the risks to the employment goal had increased and that the risks to the inflation goal had decreased.

The labor data downgrade, the rate cut hints in the FOMC minutes, and the emphatically dovish tone in Jerome Powell’s Jackson Hole speech reinforced expectations of a Fed rate cut in September. The CME FedWatch tool that tracks the expectations of interest rate traders on Friday showed the probability of a 50-basis points rate cut in September to 36 percent, up from 24 percent a week earlier and 11 percent a month earlier.

The dollar’s weakness lifted the EUR/USD pair to a high of 1.1201 on Friday from the week’s low of 1.1023 recorded on Monday. The pair added 1.47 percent during the week, closing at 1.1190 on Friday versus 1.1028 a week earlier. Data released during the week had shown the region’s inflation in July rising in line with the preliminary estimate. An unexpected decline in manufacturing PMI, a better-than-expected services PMI reading, and an unexpected worsening in the consumer confidence indicator also swayed sentiment for the euro during the past week.

The GBP/USD pair jumped 2.05 percent during the week ended August 23, lifting the sterling to $1.3209 from $1.2944 a week earlier. The pair climbed from the low of 1.2932 touched on Monday to the 2-year high of 1.3232 on Friday amidst not-so-dovish hints from Bank of England Governor Andrew Bailey at the Jackson Hole symposium. Stronger-than-expected PMI readings and the market perception that Bank of England would be slow in cutting interest rates also supported the sterling.

The Australian Dollar jumped 1.89 percent against the U.S. Dollar during the week ended August 23. The pair jumped from the low of 0.6661 recorded on Monday to 0.6799 on Friday, but eventually closed at 0.6792. The pair was at 0.6666 a week earlier. The Aussie’s moves came amidst dovish Fed hints that contrasted sharply with hawkish tone in the minutes of the Reserve Bank of Australia’s monetary policy meeting released during the week.

The USD/JPY pair slipped 2.18 percent during the past week amidst the growing monetary policy divergence between the Fed that hinted at easing and Bank of Japan that warned of further hikes. The pair dropped to 144.37, from 147.58 a week earlier. The weekly trading range was a bit wider between a high of 148.06 recorded on Monday and 144.05 on Friday. The uptick in PMI readings, the steady headline inflation, and the spike in core inflation, all seen as increasing the headroom available to the Bank of Japan to raise interest rates, further supported the yen’s climb.

Despite the Fed Chair’s overwhelming acknowledgment of the potential rate cut, lingering geopolitical tensions in the Middle East and the larger-than-expected rebound in U.S. durable goods orders lifted the Dollar Index 0.13 percent higher on Monday. It is currently at 100.85. Though markets appear to have positioned for a broader dollar weakness ahead of the September rate cut, the PCE-based inflation readings due on Friday and the non-farm payrolls data due a week later are expected to be pivotal for currency markets.

The EUR/USD pair has decreased to 1.1155 whereas the GBP/USD pair has dropped to 1.3190. The AUD/USD pair has slipped to 0.6775. The USD/JPY pair also edged down to 144.25 even as markets brace for the potential widening in the monetary policy divergence between the Federal Reserve and Bank of Japan.

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