Dollar Posts Largest Daily Drop in Four Weeks as Fed Holds Rates Steady

The dollar posted its largest single-day drop in nearly four weeks on Wednesday (29th), after the U.S. Federal Reserve (Fed) announced it would keep interest rates unchanged, calming market fears that the central bank might unexpectedly tighten monetary policy.

In late New York trading, the dollar index (DXY), which tracks the dollar against six major currencies, fell 0.5% to 100.89.

The Federal Open Market Committee (FOMC) decided to maintain the federal funds rate in the range of 3.50% to 3.75%, marking the fifth consecutive meeting with no rate change.

While most market participants expected the central bank to hold steady, recent sharp fluctuations in oil prices had heightened inflation risks, making the possibility of a rate hike higher than in recent history.

There remains a divergence within the committee on the outlook for monetary policy. Cleveland Fed President Beth Hammack, Minneapolis Fed President Neel Kashkari, and Dallas Fed President Lorie Logan all voted in favor of a 25-basis-point rate hike.

Diane Swonk, economist at KPMG, said, "Dissenting votes rarely appear out of nowhere. They often reflect the views of officials who don't have voting rights this time, or members of the Fed Board who are more cautious about publicly expressing disagreement."

She noted, "The core hawkish faction within the Fed has not only grown more resolute in recent months but also expanded in size, now including Board members. Dissenting votes from Board members carry even greater significance. They typically only vote against the consensus when they feel it's absolutely necessary. If inflation remains persistently high, officials who are currently more dovish may not be so lenient by September."

At the press conference following the rate decision, Fed Chair Kevin Warsh said the FOMC had engaged in a "wonderful family debate," with discussions being active and in-depth.

He explained that the debate centered on four main themes: persistently high inflation, recent economic shocks and the resulting price pressures, and how monetary policy tools should respond.

Warsh noted that the weaker June inflation data had "not had a significant impact" on this rate decision.

Notably, U.S. Treasury yields have continued to rise recently, effectively acting like a rate hike. Rising yields typically mean higher borrowing costs for businesses and consumers.

Since the Fed's June meeting, the yield on the 10-year U.S. Treasury note has risen by more than 14 basis points.

Warsh stated that the rise in both nominal and real yields in the U.S. Treasury market since the last meeting was one of the most significant over the past 20 years, placing it in the top decile historically. He believes the rise in Treasury yields reflects continued robust U.S. economic growth, strong corporate capital spending, rising productivity, and a resilient labor market.

Separately, Middle East tensions also captured market attention. International oil prices rebounded sharply on Wednesday, ending a week-long decline, as the brief easing in U.S.-Iran relations quickly deteriorated.

The U.S. military said Iran's Islamic Revolutionary Guard Corps (IRGC) attempted a surprise missile attack on U.S. forces stationed in the Middle East.

President Trump later told Fox News in an interview that U.S. forces had only minutes to intercept the incoming missiles and said Washington would "respond forcefully."

The U.S. military also said that U.S. and Saudi Arabian forces had launched precision strikes in Iraq against Iran-backed proxy militias. The U.S. said these militias, under IRGC command, had planned attacks on U.S. and Saudi energy facilities.

The dollar's decline boosted other major currencies.

The euro rose 0.7% against the dollar to 1.1462.

The British pound gained 0.6% to 1.3361 against the dollar. Markets will now focus on the Bank of England's (BoE) interest rate decision on Thursday.

The Japanese yen continued to strengthen, rising for the fourth time in the past six trading sessions, with the dollar-yen rate falling 0.3% to 163.41.

The Australian dollar fell 0.3% to 0.6953 against the dollar. Earlier, Australian government data showed the June consumer price index (CPI) rose 3.8% year-on-year, down from 4.0% in May, while core inflation remained unchanged at 3.6% year-on-year.

Prices as of around 6:00 a.m. Taiwan time on Thursday (30th):

Dollar index at 100.8131. -0.0087%

Euro to U.S. dollar (EUR/USD) exchange rate at 1 euro = 1.1467 U.S. dollars. +0.0087%

British pound to U.S. dollar (GBP/USD) exchange rate at 1 pound = 1.3369 U.S. dollars. +0.0150%

Australian dollar to U.S. dollar (AUD/USD) exchange rate at 1 Australian dollar = 0.6953 U.S. dollars. -0.0288%

U.S. dollar to Canadian dollar (USD/CAD) exchange rate at 1 U.S. dollar = 1.4043 Canadian dollars. -0.0214%

U.S. dollar to Japanese yen (USD/JPY) exchange rate at 1 U.S. dollar = 163.4100 Japanese yen. -0.0184%