The dollar index plunges to the lowest in 6 weeks following the Fed's liquidity supply announcement

Source: BlockMedia Original Title: [Foreign Exchange] Fed pulls out liquidity card… Dollar Index plunges to 6-week lows Original Link: The U.S. Federal Reserve(Fed and the Fed) announced a cut in the benchmark interest rate and a large-scale liquidity supply plan, causing the dollar to fall sharply. The Fed’s accommodative shift combined with political uncertainties has pushed the dollar index(DXY) down to its lowest level in six weeks.

In the global foreign exchange market, the dollar index recorded a 0.58% decline to 98.670 compared to the previous trading day. This is the lowest level in six weeks. During the trading session, it even dropped to the early 98.6 range, widening its decline.

The dollar’s weakness follows the Federal Open Market Committee(FOMC)'s decision to cut the federal funds rate target range by 25bp(0.25%) and to purchase $40 billion in Treasury bills(T-bills) each month to expand liquidity. The Fed stated, “to rebuild the reserves of the financial system,” they will begin these purchases.

The employment cost index for Q3 released on the same day rose only 0.8% compared to the previous quarter, falling short of market expectations(0.9%). Seen as a sign of cooling the labor market, it supported the Fed’s easing stance.

The Fed assessed that employment growth has slowed this year and downside risks to employment have increased. At the same time, the U.S. economic growth outlook for 2025 was revised upward from 1.6% to 1.7%, and for 2026 from 1.8% to 2.3%. Conversely, the inflation forecast for core personal consumption expenditures(PCE) increased to 3.0% and 2.5%, respectively, lower than previous estimates.

The Fed Chair stated, “The policy rate is close to the estimated neutral rate,” and “we will carefully assess the timing and magnitude of future adjustments.” However, the market is pricing in a 24% chance of an additional rate cut at the January FOMC meeting.

Political factors also influenced the dollar’s weakness. Uncertainty surrounding the nomination of the next Fed Chair has been reflected in the market, with a dovish candidate considered a likely contender.

Amid the dollar’s decline, major currencies all appreciated simultaneously. The euro rose 0.54%, reaching its highest level in 1.75 months, supported by hawkish comments from the European Central Bank(ECB). The ECB President mentioned, “There is a possibility of upward revision to growth forecasts at next week’s meeting,” while an ECB executive stated, “There is no need for additional rate cuts.”

The yen showed strength as Japan’s producer price index(PPI) for November increased 2.7% year-on-year, meeting market expectations. On this day, the USD/JPY exchange rate declined by 0.55%. It is interpreted that expectations of an early rate hike by the Bank of Japan led to increased buying of the yen.