Dollar slightly up as Fed outlook doesn't provide solid boost

The dollar index steadied just above 97 on Thursday, consolidating after a sharp rebound in the prior session as traders reassessed the Federal Reserve’s monetary policy outlook.

On Wednesday, the Fed implemented a widely anticipated 25-basis-point rate cut, its second of the year. Policymakers also projected two additional cuts before the end of 2025, but only one reduction in 2026—fewer than the two or three moves previously priced in by markets.

This recalibration tempered expectations for a prolonged easing cycle and helped the dollar recover from earlier losses. Chair Jerome Powell emphasized that the decision was a form of “risk management,” designed to cushion the economy from labor market weakness and external uncertainties, while signaling there was no urgency to accelerate cuts.

The policy vote revealed fewer divisions than investors had expected. Newly appointed Governor Stephen Miran dissented, arguing in favor of a larger 50-basis-point reduction to frontload stimulus, but most officials backed the smaller step.

Powell noted that while inflation has been trending closer to the Fed’s 2% target, risks remain tilted to the downside, justifying a cautious pace of adjustments.

The Fed’s move was part of a broader wave of global monetary easing. The Bank of Canada followed with its own 25-basis-point cut, citing subdued growth and slowing inflation. Meanwhile, the Bank of England and the Bank of Japan are both expected to keep rates steady this week, though markets are watching closely for any shifts in tone as policymakers weigh slowing global growth against persistent inflation risks.

The dollar’s rebound reflects a repricing of Fed expectations and a recognition that US rates may still remain above those of most peers in the near term. Traders will now turn their attention to upcoming US inflation data, jobless claims, and Powell’s public remarks for confirmation of the Fed’s stance. Any indication that the central bank is prepared to move more aggressively could reignite volatility across FX markets.