Rich Asplund
4 min read
The dollar index (DXY00) Wednesday recovered from early losses and rose by +0.09%. The dollar moved higher Wednesday afternoon due to hawkish comments from Fed Chair Powell, who said, “We expect a meaningful amount of inflation in the coming months.” Mr. Powell’s comments signal the Fed is not close to cutting interest rates and is supportive of the dollar. Also, heightened geopolitical risks in the Middle East support safe-haven demand for the dollar.
The dollar on Wednesday initially moved lower on the weaker-than-expected reports on US May housing starts and building permits. Also, the action by the FOMC to cut its US 2025 GDP forecast was bearish for the dollar. In addition, the FOMC’s dot-plot that projects two 25 bp interest rate cuts by the end of the year is negative for the dollar.
US weekly initial unemployment claims fell -5,000 to 245,000, right on expectations.
US May housing starts fell -9.8% m/m to a 5-year low of 1.256 million, weaker than expectations of 1.350 million. May building permits, a proxy for future construction, unexpectedly fell -2.0% m/m to a 4-3/4 year low of 1.393 million, weaker than expectations of no change at 1.422 million.
As expected, the FOMC kept the fed funds target rate unchanged at 4.25%-4.50% and said the uncertainty about the economic outlook has “diminished but remains elevated.” The statement removed the language that the committee “judges that the risks of higher unemployment and higher inflation have risen.”
The FOMC cut its US 2025 GDP estimate to 1.4% from 1.7% in March and raised its 2025 core inflation estimate to 3.1% from 2.8% in March.
The Fed’s dot plot of interest rate projections shows the median fed funds rate forecast at the end of 2025 at 3.875%, implying two quarter-point cuts this year, the same as they expected in March.
Fed Chair Powell said, “We expect a meaningful amount of inflation in the coming months” as the increases in tariffs are likely to boost prices and that their effects on inflation could be more persistent.
The markets are discounting the chances at 10% for a -25 bp rate cut after the July 29-30 FOMC meeting.
EUR/USD (^EURUSD) Wednesday fell by -0.04%. The euro on Wednesday gave up an early advance and finished slightly lower due to a rebound in the dollar. The euro was also under pressure Wednesday due to dovish comments from ECB Governing Council member Panetta, who stated that the Eurozone’s economic prospects face “substantial” risks due to US tariffs and the ongoing conflict in the Middle East.
