New York/Washington – The U.S. dollar edged up slightly on Thursday but remained close to multi-year lows, as a mildly hawkish Federal Reserve stance provided little support amid persistent concerns over U.S. policy.
The greenback ended last week with its steepest fall since April 2025, as investors grew increasingly nervous about exposure to U.S. assets, particularly in light of uncertainty surrounding U.S. policy over Greenland.
Policy Signals and Market Reaction
On Tuesday, President Donald Trump said the value of the dollar was “great” when asked whether he thought it had declined too much. His remarks added pressure to the currency, which hit a four-year low earlier in the week.
The dollar briefly turned higher on Wednesday, breaking a four-day losing streak, after Treasury Secretary Scott Bessent reaffirmed the U.S. preference for a strong currency. However, momentum faded by Thursday.
Federal Reserve Chair Jerome Powell signalled a prolonged wait before any further reductions in borrowing costs, noting that the U.S. economy shows little need for additional easing.
“While the outlook remains uncertain, particularly given the appointment of a new Fed Chair in coming months, our baseline remains that the rate cutting cycle is complete, as labour improvement lies ahead,” said David Doyle, head of economics at Macquarie Group.
“We see the next move as a hike, potentially occurring in the fourth quarter of 2026.”
The dollar’s trajectory will hinge on how issues around Fed independence play out, including a pending U.S. Supreme Court ruling on Trump’s bid to dismiss Fed Governor Lisa Cook.
Against a basket of currencies, the dollar was up 0.1% at 96.33, still hovering near Tuesday’s low of 95.566.
Euro Back in ECB Spotlight
The euro, which broke above the key $1.20 level earlier this week, traded just below at $1.1948. European Central Bank (ECB) policymakers have flagged concerns over the deflationary impact of the euro’s rapid appreciation.
Economists warn that the strong euro could amplify deflationary pressures from China’s export sector, potentially forcing the ECB into further rate cuts.
“Forecasts may change, the December staff projections indicate that a euro/dollar at 1.25 would clearly breach the option-implied density range – that is, a full overshoot and potentially enough to trigger a change in guidance,” said Geoff Yu, EMEA macro strategist at BNY.
ECB board member Isabel Schnabel reiterated that monetary policy remains in a “good place,” with interest rates expected to stay steady through early 2027.
Japan’s Fiscal Policy Still in Focus
The dollar’s weakness has provided some relief for the yen, which held flat at 153.40 per dollar on Thursday. The yen has hovered between 152 and 154 this week amid speculation of rate checks by U.S. and Japanese authorities, often seen as precursors to intervention.
Goldman Sachs noted that coordinated action by Japan’s Ministry of Finance and the U.S. Treasury could curb near-term downside pressure on the yen, but warned lasting impact would require supportive fundamentals such as tighter Bank of Japan policy or fiscal restraint.
Australian Dollar Hits Three-Year Peak
The Australian dollar drew support from expectations of a domestic rate hike as soon as next week, scaling a three-year peak before settling at $0.7038.
Conclusion
The dollar’s modest rebound underscores the fragile sentiment surrounding U.S. assets, with investors closely watching Fed independence, geopolitical risks, and global policy shifts. Meanwhile, the euro’s strength, Japan’s fiscal manoeuvres, and Australia’s rate outlook highlight how global currencies are being reshaped by both domestic and international pressures.
