U.S. Dollar Rallies to Monthly High Amid Fed’s Rate Cut Hesitation and Uncertain Cabinet Picks

The U.S. dollar surged to its strongest weekly performance in over a month as traders reassessed interest rate expectations and braced for the potential inflationary impact of President-elect Donald Trump’s proposed economic policies.

Fed Signals Caution, Traders React

Federal Reserve Chair Jerome Powell’s recent comments set the tone for market apprehension, with the Fed opting to proceed cautiously on rate cuts. Powell highlighted ongoing economic growth, robust job numbers, and persistent inflation as reasons to avoid aggressive monetary easing. Following his remarks, traders scaled back their bets for a rate cut at the Fed's December meeting, with probability estimates dropping to 61% from 82%, according to the CME FedWatch tool.

The greenback benefitted significantly, reflecting these shifts in sentiment. The dollar index climbed close to a one-year high at 107.07, marking a weekly rise of nearly 1.65%—its strongest since September—before easing slightly to 106.68 by Friday.

Currencies Struggle Against the Dollar’s Strength

The Japanese yen suffered heavily, trading above 156 yen to the dollar for the first time since July, before dropping 1.4% to 154.145. Similarly, the euro faced its second consecutive week of losses, hitting its lowest point since October 2023 before recovering slightly to $1.0540.

Sterling, meanwhile, experienced its worst weekly decline since January 2023, falling 2.4% to $1.2620. The British pound showed limited response to reports of the U.K. economy contracting in September, signaling broader macroeconomic concerns were at play.

Global FX strategist Thierry Albert Wizman of Macquarie highlighted the growing skepticism about the “Trump trade” narrative, citing concerns over inflationary pressures and potential instability arising from Trump’s cabinet picks. “The market is reassessing the sustainability of American exceptionalism under these conditions,” Wizman noted.

Retail Data and Policy Implications

Adding to the uncertainty, U.S. retail sales data for October exceeded expectations with a 0.4% rise. However, underlying consumer spending momentum appeared to wane, raising concerns about fourth-quarter economic performance. Boston Fed President Susan Collins indicated in the Wall Street Journal that upcoming jobs and inflation data would likely influence whether rate cuts pause entirely in December.

Bitcoin and Cryptocurrencies Face Profit-Taking

In the cryptocurrency market, Bitcoin experienced volatility, trading at approximately $90,000. Despite earlier gains, some investors took profits following its meteoric rally. Ethereum declined 2.17% to $3,051.30, mirroring the broader uncertainty across financial markets.

Market Outlook Remains Volatile

Analysts warned that market reactions to Powell’s remarks and Trump’s proposed economic strategies could continue driving turbulence. Marc Chandler, chief market strategist at Bannockburn Global Forex, observed, “The market overreacted to Powell’s cautious tone, but the forces unleashed by the U.S. election are far from exhausted.”