Dollar Slides 0.4% on Easing Inflation, Powell's Rate Caution

Dollar falls as US services data and Powell's comments signal easing inflation, shifting rate cut expectations.

By Athena Xu

4/3, 16:02 EDT
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Key Takeaway

  • Dollar index drops 0.4% amid easing US services sector inflation, marking its biggest decline in nearly four weeks.
  • Fed Chair Powell emphasizes need for "greater confidence" in inflation outlook, with traders now expecting fewer rate cuts.
  • Norwegian krone and Swedish krona lead gains against the dollar, while the Japanese yen falls.

Dollar Dips Amid Easing Price Pressures

The Bloomberg Dollar Spot Index experienced its most significant drop in nearly four weeks, declining by as much as 0.4% in a single day. This movement was largely attributed to easing price pressures in the US services sector and comments from Federal Reserve Chair Jerome Powell regarding the central bank's inflation targets. A report by the Institute for Supply Management indicated that growth in the US services sector slowed last month, with a gauge of input costs reaching a four-year low. Brad Bechtel, global head of FX at Jefferies Financial Group Inc., noted that the market might have overpriced the dollar, suggesting a recalibration in response to these developments.

Powell's Cautious Stance on Rate Cuts

Jerome Powell's remarks have significantly influenced market expectations, with traders now anticipating fewer rate cuts than previously expected. Powell emphasized the need for "greater confidence" in the inflation outlook before considering rate reductions, a stance that has led to a shift in market predictions from as many as six rate cuts in 2024 to less than three. This cautious approach reflects ongoing uncertainties about the inflation trajectory and the Fed's commitment to achieving its 2% inflation goal sustainably.

Services Sector Shows Mixed Signals

The Institute for Supply Management's composite gauge for the services sector fell to 51.4, indicating a continued expansion but at a slower pace. This slowdown was accompanied by a significant drop in the prices paid index to its lowest level since the pandemic began, suggesting easing price pressures in the services sector. However, concerns about inflation persist, with service-industry respondents noting that despite some price stabilization, inflation remains a concern. The overall services index was also affected by a record low in the supplier deliveries index, pointing to improving supply chains but also highlighting the complexity of the current economic environment.

Street Views

  • Brad Bechtel, Jefferies Financial Group Inc. (Neutral on the US economy):

    "It felt like a bit too much was priced in... Today’s ISM report highlights that it’s not all roses for the US economy, and therefore taking some of the steam out of it."

  • Valentin Marinov, Credit Agricole SA (Neutral on USD):

    "Powell sticks to the bumpy road characterization of the US inflation outlook he mentioned last week... The market is breathing a sigh of relief, with USD remaining under pressure."