The U.S. dollar slipped to multi-year lows against the euro and British pound on Wednesday but strengthened slightly against the Japanese yen, as traders digested shifting expectations for Federal Reserve interest rate cuts and renewed focus on U.S. fiscal policy.
Currency movements were relatively subdued after the dollar’s sharp declines earlier in the week, which followed the announcement of a ceasefire between Israel and Iran. Last week, the dollar had gained amid rising geopolitical tensions, only to reverse those gains as the situation de-escalated.
“We’re in a holding pattern now, with markets waiting for the next catalyst,” said Steve Englander, Head of G10 FX Research and North America Macro Strategy at Standard Chartered Bank.
The dollar has also been pressured by increasing market expectations that the Fed will lower interest rates later this year.
During his second day of testimony to Congress on Wednesday, Fed Chair Jerome Powell reaffirmed that interest rates should remain steady, citing concerns that tariffs imposed by the Trump administration could push inflation higher. Powell had suggested the day before that without these tariffs, the Fed would likely have continued with rate cuts.
“That comment caught the market’s attention,” Englander noted, saying it was interpreted as more dovish than Powell’s tone at last week’s FOMC meeting. “Markets have started pricing in more aggressive easing.”
Supporting this sentiment, Fed officials Michelle Bowman and Christopher Waller also recently stated that the central bank should consider rate cuts in the near future. Following their comments, futures markets now price in 62 basis points of rate cuts by the end of 2025 — up from 46 basis points last Friday. A September cut is now fully priced in.
“Investors are reading Powell’s testimony as a signal that the Fed is preparing for a rate cut as early as September,” said Karl Schamotta, Chief Market Strategist at Corpay in Toronto.
Tariffs and Fiscal Policy Take Center Stage
Investor attention is also turning back to trade policy ahead of a self-imposed July 9 deadline set by the Trump administration to finalize new trade agreements and avoid retaliatory tariffs.
Englander expects this deadline will likely be extended, especially as Congress simultaneously works on passing a major tax and spending package. A pause or extension on tariffs could ease market risks, which would be mildly negative for the dollar.
The euro strengthened by 0.43% to $1.1658 — its highest since October 2021 — while the British pound climbed 0.33% to $1.3659, a peak not seen since January 2022. The euro also drew support from expectations of increased fiscal spending within the eurozone.
Meanwhile, the Swiss franc remained near a 10.5-year high and last traded at 0.804 per dollar.
Against the yen, the dollar rose 0.18% to 145.17.
A summary from the Bank of Japan’s June policy meeting showed that officials favored holding interest rates steady due to uncertainty over the economic impact of U.S. tariffs. However, one board member expressed that the central bank might need to raise rates “decisively” to counter rising inflation pressures — signaling a potential hawkish tilt.
In the cryptocurrency market, bitcoin rose 1.72% to $105,589.
