Under the expectation of Federal Reserve rate cuts, the US dollar has strengthened instead, with the euro and yen under pressure.

Source: BlockMedia Original Title: [Forex] “Indicators are bad but the dollar is strong”… Yen and euro weaken to two-week highs Original Link:

Market Overview

Against the backdrop of spreading expectations of Federal Reserve rate cuts, the US dollar has performed strongly against major currencies. On the New York foreign exchange market on the 6th (local time), the dollar index (DXY) rose to 98.24 intraday, up 0.26% from the previous close (97.94), reaching a two-week high. This breakout from the past two weeks’ consolidation range reflects a combination of investor position changes and a decline in risk asset appetite.

Economic Data and Market Contradictions

Recent US economic data generally indicate signs of slowdown. The ISM Manufacturing Purchasing Managers’ Index (ISM) PMI (PMI) fell short of expectations, showing the largest contraction since 2024, and the S&P Global Services PMI was also downgraded, with the service sector showing weakness as well. However, the dollar has not weakened; instead, it continues to be strong.

Despite dovish comments from Federal Reserve officials, the market is still digesting the differential strength brought by relative currency depreciation. A Fed governor stated, “We need to cut rates by more than 50 basis points this year,” while a regional Fed president suggested that “policy adjustments require more precise fine-tuning.” However, some members with formal decision-making authority at the Fed remain cautious, leading the market to re-interpret the monetary policy path cautiously.

Weakening of the Euro and Swiss Franc

The US dollar has been most robust against the euro and Swiss franc. The euro weakened after Germany and France released lower-than-expected inflation data, reinforcing expectations that the European Central Bank’s tightening cycle has effectively ended. Subsequently, European government bond yields fell by 3 basis points, while US Treasury yields rose slightly, with the widening interest rate differential supporting the dollar’s strength.

The dollar rose 0.30% against the euro, 0.59% against the Swiss franc, and 0.21% against the Japanese yen to 156.6 yen. The British pound briefly hit a four-month high but then fell 0.3% amid market expectations that UK inflation indicators might follow a similar trend to Europe.

Focus for the Future

Market participants are now focusing on the Federal Reserve meeting scheduled for January 27-28 and the CPI and employment data released in mid-January. According to the CME FedWatch Tool, the market reflects an over 80% probability that the Fed will keep interest rates unchanged at this meeting, while also pricing in the possibility of two 25 basis point rate cuts throughout the year.

Expert Opinions

Foreign exchange experts believe that in the short term, factors such as economic growth differentials between Europe and the US, interest rate spreads, and fluctuations in commodity prices will interact to produce differentiated impacts on the dollar. The initial market reaction to geopolitical risks has diminished in the short term, and the strong performance of the stock market the day before has become a driving force behind the dollar’s rise.