The dollar index fell below the psychological level of 100 on Thursday as traders sold off dollars following the Federal Reserve meeting. This led to a decline in USD/JPY due to rising risks of interest rate hikes and intervention from the Bank of Japan, while signals from emerging markets and Bitcoin remained mixed. The US Dollar Index (DXY) dropped 0.5% to 99.79 as the market digested the effects of Wednesday's Fed meeting and adjusted positions in the currency market. USD/JPY saw a decline of 1%, closing at 158.22, marking one of the largest single-day drops in weeks, primarily influenced by profit-taking after the Fed meeting, rising expectations of interest rate divergence, and the outlook for Bank of Japan intervention.
The Paradox After the Fed Meeting
Firstly, hawkish expectations had largely been priced in during the days leading up to the Fed meeting, with market expectations for rate cuts dropping from two to three earlier in the year to just one now. As this narrative became widely accepted, the meeting's outcome turned into a “sell the news” event for dollar bulls. Secondly, Powell acknowledged that economic uncertainty has intensified, including the potential for oil price shocks to simultaneously suppress growth while maintaining high inflation, raising new concerns about the dollar's mid-term trajectory, especially given the possibility of a weak US economy and the Fed's limitations due to inflation issues. Finally, it is crucial to note that the divergence between the Fed and other major central banks is changing.