Dollar languishes ahead of Fed decision

The dollar index held around 96.7 on Wednesday, hovering at its lowest level in two and a half months and down roughly 1% so far this week, as traders positioned ahead of the US Federal Reserve’s monetary policy decision.

The Fed is widely expected to cut interest rates by a quarter point later in the day, with futures pricing in about 67 basis points of easing by the end of the year.

Expectations of policy loosening have been reinforced by recent data showing continued signs of a cooling labor market, even as inflation remains sticky and above the Fed’s 2% target.

Markets will also focus heavily on the Fed’s quarterly “dot plot,” which lays out policymakers’ individual interest rate projections.

Any indication that the majority of Fed officials anticipate more aggressive easing into 2026 could deepen downside pressure on the dollar, while a more cautious stance may temper the currency’s recent decline.

Analysts caution that Powell’s tone at the press conference will be just as critical as the rate decision itself, given the delicate balance between supporting growth and avoiding an inflation resurgence.

On the data front, US retail sales rose in August for a third consecutive month, pointing to broad-based strength in consumer spending and capping a resilient summer for household demand. The data complicates the Fed’s calculus, as robust consumption could limit the scope for extended monetary easing.

In currency markets, the dollar slipped broadly against major peers. It touched a four-year low against the euro, fell toward multi-week troughs versus sterling, and weakened against commodity-linked currencies such as the Australian and Canadian dollars. The yen traded more cautiously, with investors awaiting the Bank of Japan’s decision later in the week.

Overall, the dollar’s near-term trajectory hinges on whether the Fed matches market expectations for an extended easing cycle or pushes back with a more measured outlook. Traders see room for volatility around both the policy announcement and Powell’s remarks, which could reset positioning across global FX markets heading into the final quarter of the year.