The U.S. dollar rebounded on Tuesday and remained steady in early Wednesday in Asia (local time), reversing its sharp decline from the previous week as investors digested recent hawkish comments from Federal Reserve officials.
The dollar index (DXY), which tracks the greenback against six major currencies, rose by 0.25 percent to 105.52. As of writing, it has edged up 0.04 percent to 105.58. Last week, the index plunged 1.4 percent, its steepest weekly decline since mid-July.
Last week’s loss was attributed to the dovish tone from Fed Chair Jerome Powell following the central bank’s two-day policy meeting, which left interest rates unchanged. A weaker-than-expected U.S. jobs report released last Friday further pressured the currency.
This shift coincided with a rally on Wall Street, with the S&P 500 and Nasdaq extending their winning streaks to the longest in two years. These developments further fueled market uncertainty on whether interest rates have peaked and when the Fed might begin easing its monetary policy stance.
Market expectations have shifted towards a lower likelihood of further interest rate hikes by the Fed, pricing in three 25-basis-point rate cuts by November of next year. As the U.S. economy cools down, the dollar could face additional downward pressure.
Despite easing market expectations for further interest rate hikes, several Fed officials suggested caution. They cited the robust third-quarter gross domestic product growth of 4.9 percent and ongoing inflationary pressures.
Fed Governor Christopher Waller emphasized the need for vigilance as the central bank considers its next policy moves. His colleague, Michelle Bowman, suggested that the strong economic data showed that the U.S. economy had gained speed and required a higher policy rate.
Minneapolis Fed President Neel Kashkari also said that the central bank may need further action to curb inflation and bring it down to its two percent target. Meanwhile, Chicago Fed President Austan Goolsbee acknowledged the progress made in taming price pressures but stressed the need for continued vigilance.
Other currencies struggle
In contrast to the advancing dollar, the euro was dented by a larger-than-expected fall in German industrial production in September. As of writing, it stands at $1.0692.
“The data comes after the German manufacturing PMI showed a deep contraction in October and suggests that the sector remains under pressure, acting as a drag on the German economy,” said Fiona Cincotta, senior financial market analyst at City Index, as quoted by Reuters.
The Australian dollar also fell after the Reserve Bank of Australia (RBA) raised interest rates by 25 basis points to a 12-year high to combat persistent inflation.
However, the currency has since recovered by 0.03 percent to 0.6437 but remains on track for its most significant one-day percentage decline in a month. It reached a three-month high of $0.6523 on Monday.
The Japanese yen is up 0.11 percent at 150.50 against the greenback. The currency remains above the key 150 level that has prompted intervention concerns from Japanese authorities in recent weeks.
Yields, equities
Treasury yields retreated ahead of significant bond auctions this week, with U.S. benchmark 10-year yields declining in five out of the last six sessions and 30-year yields falling in four of the last five.
The two-year yield, which mirrors interest rate expectations, dropped by 2.8 basis points to 4.913 percent. Meanwhile, the 10-year yield slipped by 8.7 basis points to 4.575 percent.
In the stock market, the Nasdaq Composite rose by 0.9 percent, the S&P 500 gained 0.28 percent, and the Dow Jones Industrial Average edged up 0.17 percent.
However, global equity indices retreated. MSCI’s gauge of global stock performance dipped 0.15 percent, and the pan-European STOXX 600 index slipped 0.16 percent.