At its latest policy meeting, the Federal Reserve announced that it would keep the target range for the federal funds rate unchanged at 3.5% to 3.75%, marking its fifth consecutive decision to hold steady. Following the rate decision, the Bloomberg Dollar Spot Index fell approximately 0.3%, posting its largest single-day decline since July 15 and representing the dollar’s weakest performance after a Fed rate-hold announcement in nearly two years. The dollar declined against most major currencies, with the Norwegian krone leading gains; in addition to dollar weakness, renewed tensions in the Middle East pushed international oil prices higher, which also provided support for oil-producing countries’ currencies.
Market moves expanded further during Federal Reserve Chair Warsh’s press conference. Warsh explicitly noted that U.S. Treasury yields have risen markedly since the previous policy meeting, implying that financial markets have already accomplished part of the tightening effect that would otherwise have required rate hikes. This remark was widely interpreted by the market as signaling that the urgency for further near-term rate increases by the Fed has diminished. Yusuke Miyairi, a foreign-exchange strategist at Nomura in London, commented that Warsh is essentially treating the recent rise in long-term bond yields as a substitute for rate hikes, which is weakening expectations for further tightening and putting pressure on the dollar.
Pricing in interest-rate derivatives markets also quickly reflected the shift in expectations. Before the meeting, amid energy-price increases driven by geopolitical factors, traders generally saw roughly a one-third probability of a rate hike at this meeting, and markets had even nearly fully priced in the possibility of a September rate increase. However, after the decision was announced, expectations for a September hike fell to just above 50%, with markets instead pricing in that the Fed would not complete this cycle of rate increases until December.
Following the decision, various asset classes experienced sharp volatility. U.S. stocks fluctuated and briefly recovered, while U.S. Treasury yields dipped momentarily before rebounding quickly, with the 10-year yield rising back to around 4.63%. Notably, after Warsh’s remarks, the 30-year Treasury yield briefly climbed to its highest level since 2007, reflecting that markets remain vigilant about long-term inflation and fiscal financing pressures.
Despite the dollar’s clear decline on Wednesday, analysts remain cautious about its longer-term outlook. Nathan Thooft, a senior portfolio manager at Manulife Investment Management, said that this decision not to hike was sufficient to trigger a technical correction of around 0.5% in the dollar, but over a longer horizon, the dollar’s current rally may have already peaked, and the subsequent pullback is expected to be gradual rather than a sharp downturn.
