US Dollar Forecast: Rebounds as Treasury Yields Rise After Fed Rate Cut

U.S. Dollar Strengthens in Volatile Session Following Fed Rate Cut

The U.S. dollar is trading mixed on Thursday after an initial decline, following the Federal Reserve’s decision to cut interest rates by 50 basis points. Despite early weakness, the dollar rebounded sharply as Treasury yields rose, driven by stronger-than-expected weekly jobless claims data. Investors shifted their focus from recession fears to a more optimistic economic outlook.

At 13:10 GMT, the U.S. Dollar Index is trading 100.915, down 0.018 or -0.02%.

Fed’s Rate Cut and Dovish Outlook

The Federal Reserve cut its benchmark interest rate by 50 basis points, bringing it to a range of 4.75%-5%. While this decision was largely anticipated, the dovish tone of the Fed’s forward guidance caught many investors by surprise. Money markets had initially priced in a 65% chance of a 50-basis-point cut, with expectations of additional cuts through 2024.

“The Fed’s decision was quite dovish, which aligns with a near-term rebound in risk assets and potential dollar weakness,” noted Lefteris Farmakis, forex strategist at Barclays. However, he cautioned that the Fed’s easing cycle priced in by markets is substantial, making further significant dollar weakness uncertain. The central bank signaled further rate cuts of 70 basis points in 2024, with more cuts projected through 2026.

Dollar Index Recovers Amid Treasury Yield Gains

The U.S. dollar index (DXY), which tracks the greenback against a basket of six major currencies, recovered from early losses. Treasury yields, particularly the 10-year yield, rose as investors bet on a soft landing for the U.S. economy, fueled by an unexpected drop in jobless claims. Weekly jobless claims fell by 12,000 to 219,000, far below expectations, signaling continued labor market strength.

Bank of England Holds Rates Steady

Sterling surged to its highest level since March 2022 after the Bank of England’s Monetary Policy Committee voted to keep rates unchanged, with only one member voting for a rate cut. The pound climbed 0.60% against the U.S. dollar to $1.3287, while the euro also gained 0.35%, trading at $1.1157. Meanwhile, the dollar strengthened against the yen, rising 0.50% to 142.99, as short dollar/yen positions unwound post-Fed.

Market Forecast

Looking ahead, the U.S. dollar may face short-term headwinds due to the Fed’s dovish outlook and expectations of continued rate cuts through 2024. However, with robust labor market data and rising Treasury yields, the dollar could remain resilient in the near term.

Traders should monitor upcoming economic indicators, particularly employment data, as well as central bank commentary, which will heavily influence the dollar’s direction in the coming weeks. Overall, the greenback is likely to trade within a range, with downside risks balanced by strong economic fundamentals.