The U.S. dollar weakened on Monday as investors digested the cautious comments from Federal Reserve Chair Jerome Powell, who signaled that the central bank may be nearing the end of its rate-hike cycle.
Powell said on Friday that the Fed’s monetary policy was slowing the economy as expected, with the benchmark overnight interest rate “well into restrictive territory.” He also reiterated that the Fed was ready to adjust policy if needed, but did not give any clear hints on the timing or direction of the next move.
Markets interpreted Powell’s remarks as dovish, meaning they expect the Fed to be more lenient on inflation and less aggressive on tightening. According to the CME’s FedWatch tool, the probability of a rate cut by the March meeting rose to 60% from 21% just over a week ago.
According to a report by Reuters, the U.S. dollar index, which measures the greenback against six major currencies, slipped to 103.28, near its lowest level since late October. The dollar also lost ground against the yen, falling to 146.58 yen, its weakest since September.
The dollar’s decline came despite strong U.S. economic data, which showed that the gross domestic product (GDP) grew at an annualized rate of 5.2% in the third quarter, according to the second estimate from the Bureau of Economic Analysis (BEA). The growth was driven by robust consumer spending and inventory investment, while imports also increased.
The BEA also reported that corporate profits rose 3.3% in the third quarter, after a marginal increase of 0.2% in the second quarter. The profit growth reflected higher revenues and lower taxes for U.S. businesses.
However, some analysts warned that the U.S. economy may face headwinds in the coming months, as the effects of the fiscal stimulus fade and the trade tensions with China persist. The U.S. and China are locked in a bitter dispute over tariffs and technology, which has rattled global markets and dampened business confidence.
The U.S. and China are expected to resume high-level talks in January, but the prospects of a comprehensive deal remain uncertain. President Donald Trump has threatened to impose more tariffs on Chinese goods if no progress is made.
Meanwhile, the U.S. labor market remains a bright spot, with the unemployment rate at a 49-year low of 3.7%. The closely watched non-farm payrolls report for November will be released on Friday, and analysts expect the U.S. economy to add 200,000 jobs, slightly below the 250,000 jobs created in October.
The Fed will hold its next policy meeting on December 18-19, and most economists expect the central bank to raise rates by a quarter percentage point, marking the fourth hike this year. However, the Fed’s outlook for 2023 and beyond will be more important for the markets, as they look for clues on how the Fed will balance the risks of slowing growth and rising inflation.
Some experts believe that the Fed may pause or end its rate-hike cycle sooner than expected, given the signs of moderation in the U.S. economy and the uncertainties in the global environment. Others argue that the Fed should continue to raise rates gradually, as the U.S. economy remains strong and inflation is close to the Fed’s 2% target.
The Fed’s decision will have significant implications for the U.S. dollar and the global financial markets, as the Fed’s policy affects the cost and availability of money around the world. The Fed’s actions will also influence the policies of other central banks, such as the European Central Bank and the Bank of Japan, which have kept their interest rates at ultra-low levels to support their economies.
As the year draws to a close, the U.S. dollar faces a crucial test, as the markets weigh the prospects of the U.S. economy and the Fed’s policy stance. The U.S. dollar may regain some strength if the U.S. and China reach a trade truce and the Fed signals more rate hikes ahead. Alternatively, the U.S. dollar may lose more ground if the U.S. and China escalate their trade war and the Fed adopts a more cautious tone.
