The dollar index (DXY00) is down -0.30%, falling back from last Friday’s 1-week high. The dollar continues to see underlying weakness as the FOMC is expected to cut interest rates by about -50 bp in 2026, while the BOJ is expected to raise rates by another +25 bp in 2026, and the ECB is expected to leave rates unchanged in 2026.
The dollar is also under pressure as the Fed boosts liquidity in the financial system, having begun purchasing $40 billion a month in T-bills in mid-December. The dollar is also being undercut by concerns that President Trump intends to appoint a dovish Fed Chair, which would be bearish for the dollar. Mr. Trump recently said that he will announce his selection for the new Fed Chair in early 2026. Bloomberg reported that National Economic Council Director Kevin Hassett is the most likely choice as the next Fed Chair, seen by markets as the most dovish candidate.
In a bearish factor for the dollar, Fed Governor Stephen Miran said today, “If we don’t adjust policy down, then I think we do run risks” of a recession. However, he also said he doesn’t foresee a recession.
The markets are discounting a 20% chance that the FOMC will cut the fed funds target range by -25 bp at the January 27-28 FOMC meeting.
EUR/USD (^EURUSD) is up +0.48% on weakness in the dollar. The euro found support from comments by ECB officials today, who said they are satisfied with the current outlook for no interest rate cuts.
ECB Governing Council member Gediminas Simkus today indicated satisfaction with the current level of interest rates, saying, “We have inflation – headline and core – both now and in the near future, and mid-term, close to the 2% level. The interest rate is seen by many as at a neutral level. Economic growth has improved though remains sluggish.”
Meanwhile, ECB Governing Council member Peter Kazimir said today that the ECB is comfortable with current rates but stands ready to act if conditions change. He said the current period of on-target inflation and steady economic expansion is “rather fragile” and that risks remain from tariffs and the Russia-Ukraine war.
Swaps are pricing in a 0% chance of a -25 bp rate cut by the ECB at the next policy meeting on February 5.
USD/JPY (^USDJPY) today is down -0.47%. The yen has underlying support from last Friday’s +25 bp rate hike by the Bank of Japan. The yen also has support from interest rate differentials, with the 10-year JGB yield today rising +4.9 bp to 2.021% and posting a new 26-year high.
