DXY: U.S. Dollar Index on Shaky Ground as Fed Signals Lower Rates

The U.S. Dollar Index (DXY) has been on shaky ground this week as traders digested a slew of macro data and the Fed’s latest decision on interest rates.

Fed Signals Just a Single Rate Cut for 2024

This week, the U.S. Fed lowered its interest rate cut projection to only a single rate cut in September, compared to the earlier expectation of three rate cuts this year. While traders cheered a softer Consumer Price Index (CPI) print for May, the Fed raised its inflation forecast for 2024 to 2.8% from 2.6% (excluding food and energy).

Still, markets are hoping for multiple rate cuts this year, but such a scenario would largely hinge on the three inflation and jobs readings between now and September. The Fed is walking a tightrope between cutting rates too soon and waiting too long to act. If it cuts rates sooner than necessary, its progress on the inflation front could take a hit. On the other hand, waiting too long to slash rates could push the economy toward a downturn. Still, a softer Producer Price Index (PPI) for May paints the right picture in the Fed’s fight to tame inflation. With the Fed keeping rates unchanged for a seventh consecutive time this month, the DXY is up by nearly 0.56% over the past five sessions.

Meanwhile, other major central banks are charting a diverging course from the Fed. The ECB and the Bank of Canada have already slashed interest rates this month. The Euro (FX:USD-EUR) has fared weaker against the dollar this week after French President Emmanuel Macron called for a snap election. The Japanese Yen (FX:USD-JPY) is also displaying minor weakness after the Bank of Japan maintained its interest rates this week.  

Is the DXY Expected to Rise or Fall?

The current macro environment suggests a potentially limited upside for the DXY over the coming periods. However, a flare-up in geopolitical tensions or a sudden uptick in inflation could lend strength to the index.

Read full Disclosure