Dollar on defensive despite Powell's caution on further easing

Synopsis

The dollar weakened, nearing its lowest point in a week. Traders anticipate two more US interest rate cuts this year. This is despite Federal Reserve Chair Jerome Powell's cautious stance on further easing. The dollar index saw a drop this week. Market bets are on quarter-point rate cuts at the remaining Fed policy meetings.

The dollar hovered near its weakest level in close to a week on Wednesday with traders expecting two more U.S. interest rate cuts this year, even after Federal Reserve Chair Jerome Powell struck a cautious tone on further easing.

The dollar index, which measures the U.S. currency against six major rivals, languished 97.230 as of 2305 GMT, after earlier touching the lowest since Thursday at 97.198.

The index has dropped 0.5% so far this week on market bets for quarter-point rate cuts at each of the remaining two Fed policy meetings this year. Another is expected in the first quarter of 2026, broadly aligning with forecasts from Fed officials following a quarter-point reduction on Wednesday of last week.

The dollar had bounced back from the lowest level since early 2022 at 96.224 after the Fed's announcement and Powell's subsequent news conference, which fell short of the market's more dovish expectations, based on the need to support a sharp weakening of the labor market.

Overnight, Powell said the central bank needs to continue balancing the competing risks of high inflation and a faltering job market in coming policy decisions, in remarks that echoed those from last week. He called the policy dilemma "a challenging situation."

"Powell's overnight remarks underscored the central bank's cautious approach," said James Kniveton, senior corporate forex dealer at Convera.

"Powell acknowledged the absence of risk-free policy options, warning that premature easing could entrench inflation whilst excessive monetary restriction might unnecessarily damage employment prospects."

The dollar eased 0.04% to 147.59 yen.

The euro edged up slightly to $1.1816.

Australia's dollar slipped slightly to $0.6598 ahead of local consumer inflation data later in the day.

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