The US dollar strengthened in European trading on Thursday, marking its second consecutive session of gains against a basket of major currencies. The rally followed easing concerns about a US recession and positive signals from trade negotiations.
The dollar index climbed 0.35% to 100.21, after hitting a session low of 99.61. This comes after a 0.5% rise on Wednesday, the index’s first gain in four sessions, driven by the Federal Reserve’s latest policy decisions.
Trump Teases Major Trade Deal Announcement
US President Donald Trump announced plans to unveil a significant trade agreement with a “highly respectable country” during a press conference later in the day. Analysts speculate the deal could involve the UK, which recently secured a free trade agreement with India.
The potential agreement is seen as part of broader efforts to ease trade tensions and stimulate economic growth.
Fed Holds Rates Steady Amid Inflation and Tariff Concerns
The Federal Reserve kept interest rates unchanged for the third consecutive meeting, maintaining them below 4.5% due to lingering economic uncertainties.
In its statement, the Federal Open Market Committee (FOMC) emphasized vigilance over rising inflation and unemployment risks, particularly those linked to tariffs. The Fed warned that prolonged trade barriers could drive prices higher and stifle growth, raising the possibility of an inflationary recession.
Most policymakers believe the central bank can afford to wait for clearer economic data before adjusting monetary policy. The decision comes as the US government engages in critical trade negotiations during a 90-day tariff truce.
Powell Signals Cautious Approach on Rates
Fed Chair Jerome Powell delivered key insights following the meeting:
He anticipates short-term inflation to rise, with tariffs playing a major role in driving price pressures. Powell noted that the impact of tariffs has exceeded initial expectations and warned that sustained trade barriers could lead to higher inflation and job losses.
Despite these risks, the Fed remains patient, with no immediate plans to cut interest rates. However, Powell left the door open for potential rate reductions later this year if economic conditions warrant.
Market Adjusts Rate Cut Expectations
Following the Fed’s meeting, market expectations for a June rate cut dropped significantly. According to the CME FedWatch Tool, the probability of a 0.25% reduction fell from 32% to 20%. Similarly, the likelihood of a July cut declined from 71% to 66%.
Conclusion
The US dollar’s rebound reflects growing optimism over trade developments and the Fed’s measured stance on monetary policy. While inflation and tariff-related risks persist, the central bank’s cautious approach suggests stability in the near term. Investors will closely monitor upcoming trade announcements and economic data for further direction.
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