The DXY-U.S. dollar index, which tracks the value of the U.S. currency against six major rivals, hit a fresh 12-week high of 104.45 during last Friday’s session as Fed Chair Jerome Powell left open the possibility of further interest rate increases to cool still-too-high inflation, that would support dollar and bond yields.
The most eye-watched currency index -DXY- is up over 2% in August and set to snap a two-month losing streak, recovering most of the recent losses during the Q1-Q2 U.S. banking crisis.
DXY-U.S. dollar index, 4-hour chart
The dollar strength has sent major peers, the Euro and the Pound Sterling to hit two-month lows of $1.0780 and $1.2550, while the Japanese Yen extended recent losses to ¥146.50 on BoJ's ultra-dovish policy.
EUR/USD pair, 4-hour chart
During the well-awaited speech at the annual Jackson Hole Economic Policy Symposium on Kansas, Powell said that the Federal Reserve would “proceed carefully” on whether to raise interest rates again (if needed) and intends to keep rates high until inflation is on a convincing path toward the Fed’s 2% target. https://www.reuters.com/markets/us/fed-registers-gains-powell-may-take-lay-low-approach-2023-08-25/
Powell added that past interest-rate increases had yet to slow the economy fully, an argument for holding rates steady for now, but kept the door open to raising them later this year if the economy doesn’t slow enough to control inflation declining.
In this context, market participants are separated as to whether the U.S. central bank will raise interest rates by 25 bps on the next FOMC monetary meeting on September 20, or later the year, or hold them steady, depending on the upcoming U.S. economic and labor data.
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