The dollar index weakened to 106.8 on Thursday as traders assessed the likelihood of the Federal Reserve maintaining interest rates at current levels for an extended period while awaiting further developments on the trade war and the implications of President Donald Trump's policies.
Dollar weakens, tariffs and Fed weigh
Uncertainty surrounding U.S. trade policy and global economic conditions contributed to the dollar's decline, as investors weighed the potential impact of new tariffs and shifting monetary policy expectations.
On Wednesday, President Trump announced plans to introduce additional tariffs within the next month, expanding his trade agenda to include duties on lumber and forest products. This move follows his previously stated intentions to impose tariffs on imported cars, semiconductors, and pharmaceuticals, further heightening trade tensions with key global partners. Market participants are closely monitoring how these measures might affect inflation and corporate earnings, particularly in sectors reliant on international supply chains.
Fed minutes impact
Meanwhile, minutes from the latest Federal Open Market Committee (FOMC) meeting reinforced the Fed’s cautious stance, emphasizing a data-driven approach to monetary policy. Policymakers signaled no immediate urgency to cut interest rates, citing persistent inflation concerns and the potential economic consequences of tariffs and other policy shifts. The Fed’s stance has led investors to reassess expectations for rate cuts, with some now anticipating fewer or delayed reductions in borrowing costs.
Labor market data
On the economic front, labor market data pointed to continued strength, with initial jobless claims rising modestly by 5,000 to 219,000 last week. Although slightly above expectations, the figure remains consistent with a tight labor market, supporting the Fed’s argument for patience in adjusting interest rates.
In currency markets, the greenback was mostly lower against the yen amid increasing speculation that the Bank of Japan will raise borrowing costs this year, marking a potential shift in its ultra-loose monetary policy. A stronger yen reflects growing expectations that Japan’s central bank may finally exit negative interest rates, narrowing the policy divergence between the Fed and the BOJ and exerting downward pressure on the dollar.
