Dollar pauses rally as investors digest Fed rate outlook

Forex news: The US Dollar took a breather on Thursday after a strong run, as investors weighed recent comments from Federal Reserve officials that suggest continued tight monetary policy for the foreseeable future.

The Dollar has been on a tear in recent weeks, fueled by robust US economic data and persistent inflation concerns.  This data dashed earlier expectations of near-term interest rate cuts from the Fed. Rising tensions in the Middle East further bolstered the Dollar's safe-haven appeal.

The Dollar's strength has weighed heavily on other currencies. The Japanese Yen has been particularly hard hit, trading near 34-year lows, prompting warnings from Japanese authorities. Emerging-market currencies have also faced pressure.

US, Japan, and South Korea coordinate on forex markets

In a nod to concerns from Tokyo and Seoul, the three nations agreed to closely monitor foreign exchange markets during their first trilateral finance dialogue on Wednesday.

The Euro edged slightly lower on Thursday after a gain on Wednesday, while Sterling remains flat. The Dollar index retreated slightly from its five-and-a-half-month peak but is still up significantly year-to-date.

Shifting expectations for Fed rate cuts

Markets are now pricing in a much lower number of rate cuts from the Fed in 2024 compared to earlier forecasts. September is seen as the earliest potential starting point for easing, a significant shift from earlier expectations of June.

Recent economic data, including the CPI report, and hawkish comments from Fed officials have contributed to the altered rate cut view. A Fed survey showed continued inflationary pressures and stable economic growth. Fed Governor Bowman suggested progress on inflation might be stalling, raising questions about the adequacy of current interest rates.

Japanese Yen strengthened slightly but remains close to its 34-year low. Market participants now believe intervention by Japanese authorities is more likely at the 155 yen level than previously thought. Japan last intervened in the forex market in 2022.

(With Reuters inputs.)