US Dollar Index (DXY) is mounting up for the third consecutive day. It is still sitting close to three-month highs, at about 99.74. This increase comes on the heels of the Federal Reserve’s recent actions. On Wednesday, they executed a second straight 25-basis-point (bps) “risk-management” rate cut. The increase, which was generally expected by the market, has since resulted in two different takes on the intended path of future U.S. monetary policy.
Just two years ago, Kansas City Fed President Jeffrey Schmid voted to leave rates unchanged this week. He characterized the new policy setting as “just modestly restrictive.” This comment indicates a dovish and wary approach from the Fed. It implies that policies today aren’t very aggressive but they don’t show any signs of tightening in the near future either. Schmid’s statements point to a larger discussion still underway inside the central bank. This year’s discussion will be about determining the best path forward with a shift in economic currents.
In August, the Gross Domestic Product (GDP) shrank by 0.3% m/m, much worse than the expected flat reading. On top of that, growth for July was revised upwards to 0.3% from the previously estimated 0.2%. Yet the economic data continue to send mixed signals. This complexity makes the Fed’s task just as confounding as it prepares for future rate increases.
The USD/CAD currency pair is currently hovering around the 1.4009 level. Mechanically it has indeed climbed back near a one-week high after earlier this week briefly sinking to a one-month low. The Bank of Canada (BoC) just cut its key rate by 25 bps to 2.25%. This cut suggests that the easing cycle is drawing to a close. This decision follows on the heels of widespread questioning of Canadian economic indicators, from GDP figures to jobs data.
Jerome Powell, the Chair of the Federal Reserve, made clear that any further rate increase “is not a foregone conclusion.” This comment highlights even more the uncertainty of what’s to come with future monetary policy and market expectations. The odds of a quarter-point rate cut in December have plunged to roughly 66.8%. Just a week ago, that likelihood was at 91.7%.
As investors continue to take in these developments, the bid for the US dollar has surged. The DXY’s June 30 upward trajectory shows that traders are looking for safety and stability during confusing or changing economic conditions. What’s really mattered beyond the obvious policy of interest rate adjustments, the Fed’s recent actions and statements have been key in establishing market sentiment.
Dallas Fed President Lorie Logan, who communicated her desire to continue holding rates constant in this week’s meeting. This goes to show how split the opinions are among Fed officials over what direction monetary policy should head. This divergence serves as a stark reminder of the real world challenges of balancing pro-economic growth policies with anti-inflationary pressures.