The dollar edged lower on Thursday, retreating from two-week highs following the Federal Reserve’s mixed decision to keep interest rates unchanged.
The move prompted traders to scale back bets on further policy tightening next year, while the euro and the yen traded with caution ahead of upcoming policy announcements from Frankfurt and Tokyo.
The U.S. Dollar Index, which tracks the greenback against a basket of six major currencies, slipped slightly to 102.17.
The pullback followed a press conference held by Federal Reserve Chair Kevin Warsh after the meeting, which failed to provide clear guidance on whether the U.S. central bank would resume raising borrowing costs before the end of the year.
The euro remained largely unchanged, hovering near its lows for the year, while the Japanese yen found modest support as a safe-haven asset—rising 0.1% to 157.76 per dollar—as currency dealers closed out positions ahead of the Bank of Japan’s decision on Friday.
Fed Holds Rates Amid "Hawkish" Dissent; PCE Data Awaits
On Wednesday afternoon, the Federal Open Market Committee (FOMC) kept the target range for the federal funds rate unchanged at 3.75% to 4.00%, though two committee members dissented, advocating for an immediate 25-basis-point hike.
Although the Fed upgraded its assessment of economic activity—describing growth as "active"—Warsh expressed confidence that inflation could return to the 2% target without causing a significant deterioration in labor market conditions. His refusal to commit to a clear path for December led money markets to trim expectations for a rate hike in 2027 [sic], although interest rate futures continue to price in a 78% probability of a hike at the final FOMC meeting of the year.
"The outlook for the dollar remains unchanged following this Fed meeting. A December hike is still on the table," said Francesco Pesole of ING.
"We expect a moderately positive reaction from the dollar to today’s data (PCE)."
The immediate direction for the dollar hinges on the release of the U.S. Personal Consumption Expenditures (PCE) price index for September, due at 15:30 Moscow time.
Forecasts point to a 0.3% monthly increase in the core index, with annual inflation expected to accelerate to 3.6% from 3.4%. Data coming in higher than anticipated would reinforce expectations for a December hike and could push the dollar back toward its annual highs above 102.50.
Euro under pressure from France’s fiscal woes ahead of ECB decision
The single currency remained capped near $1.1125 ahead of the European Central Bank Governing Council’s policy decision, due at 16:15 Moscow time, where policymakers are expected to keep the deposit rate unchanged at 2.50%.
The dilemma facing policymakers in Frankfurt remains acute. While headline inflation in the eurozone reached 3.8% in September, driven by high energy prices, a sharp rise in sovereign bond yields—particularly in France—has already led to a significant tightening of financial conditions across the region.
The yield on 10-year French government bonds climbed above 5.14% last week, before retreating below 5% after Moody’s affirmed the country’s rating at Aa3.
However, with the spread between French and German bonds hovering near 158 basis points and domestic consumer confidence falling to a 13-year low, the euro faces structural headwinds.
Traders are closely watching for the press conference by ECB President Christine Lagarde, scheduled for 16:45 Moscow time.
"With energy prices rising above the 'adverse' scenario envisioned in September, a somewhat hawkish stance is justified; however, higher yields and tighter financial conditions leave room for a more balanced overall tone," analysts at Deutsche Bank noted. Any signal confirming that a December rate hike is largely priced in—consistent with current market expectations of an approximately 80% probability—could trigger a rebound in the common currency as short positions are covered. Conversely, a non-committal stance—citing factors such as narrowing sovereign spreads and weakening private-sector credit demand—could expose technical support levels at 1.1065 and 1.0880.
Yen stabilizes ahead of Bank of Japan decision
In Tokyo, the yen found support near 157.76 against the dollar, recovering some of its recent losses as market participants braced for the conclusion of the Bank of Japan’s two-day policy review on Friday.
The Bank of Japan is widely expected to keep its short-term policy rate unchanged at 1.25%, opting for a pause following a landmark hike in September that pushed Japanese borrowing costs to their highest level in 31 years.
With nationwide core inflation holding at 2.1% and corporate wage growth gaining momentum, strategists note that the yen could strengthen if Governor Kazuo Ueda signals the central bank’s readiness to tighten policy further—either in December or early next year—to counter imported inflationary pressures.