The U.S. dollar experienced a slight decline against both the Japanese yen and the euro on Thursday, although it managed to hold above recent multi-year lows. This movement came as investors remained cautious about U.S. policy directions, even as a somewhat hawkish stance from the Federal Reserve offered some temporary support to the greenback.
Factors Pressuring the Dollar
The dollar has faced sustained pressure from multiple fronts, including expectations of ongoing Federal Reserve rate reductions, uncertainties surrounding trade tariffs, and overall volatility in U.S. policy. Last week, the currency recorded its most significant weekly drop since April, partly driven by growing concerns over U.S. policy decisions related to international issues like Greenland.
Shaun Osborne, chief currency strategist at Scotiabank, highlighted the impact of these factors, stating, "Concerns that investors have about trade and geopolitical policies that have been wheeled out in the U.S. at the moment have been potentially negative for the dollar."
In specific trading terms, the dollar slipped 0.2% to 153.055 yen, while the euro gained 0.5% to reach $1.196. The dollar found a degree of stability following the Federal Reserve's decision to maintain interest rates steady on Wednesday. Fed Chair Jerome Powell described the U.S. economy as solid, with reduced risks to both inflation and employment.
Labor Market and Interest Rate Dynamics
Recent data revealed a slight decrease in the number of Americans filing new unemployment claims last week, indicating relatively low levels of layoffs. However, sluggish hiring trends continue to fuel household anxieties about the labor market's health.
President Donald Trump added to the discourse on Thursday, asserting that the U.S. should currently have substantially lower interest rates and aim for the lowest rates globally. Despite this, some analysts remain skeptical about imminent rate cuts.
David Doyle, head of economics at Macquarie Group, explained, "While the outlook remains uncertain, particularly given the appointment of a new Fed Chair in coming months, our baseline remains that the rate cutting cycle is complete, as labour improvement lies ahead. We see the next move as a hike, potentially occurring in the fourth quarter of 2026."
Mixed Messaging and Investor Sentiment
Earlier in the week, the dollar came under additional pressure after President Trump commented on Tuesday that the dollar's value was "great", when questioned about its recent decline. Although Treasury Secretary Scott Bessent reaffirmed the U.S. preference for a strong currency, alleviating some pressure, investors remain nervous about potential further losses.
Osborne noted the confusion, saying, "We're getting kind of mixed messaging on the dollar from the White House and the Treasury ... that doesn't necessarily instil a lot of confidence."
While Thursday's trading showed signs of the dollar stabilizing after its sharp earlier decline, concerns about the near-term outlook persist. Steven Englander, global head of G10 FX research and North American macro strategy at Standard Chartered Bank, observed in a note, "Short-term momentum has turned sharply against the USD without adequate resistance from any of the long-term forces we had expected to support the currency."
Euro Strength Back in ECB Spotlight
The euro's recent ascent above the critical $1.20 level has drawn attention from European Central Bank policymakers. They have warned that the currency's rapid appreciation could exert deflationary pressures on the eurozone economy.
Geoff Yu, EMEA macro strategist at BNY, commented, "Although the euro/dollar stayed well above the ECB’s base scenario last year without triggering strong disinflation risk, trade uncertainty persists."
Economists have pointed out that the euro's strength might amplify deflationary effects from China's export activities, potentially pushing the ECB out of its current comfortable position and into further interest rate cuts. ECB board member Isabel Schnabel reiterated on Wednesday that monetary policy is in a 'good place', with rates expected to remain at current levels for an extended period. Financial markets are currently pricing in steady rates through early 2027.
Japan's Fiscal Policy Remains Key Focus
The dollar's slide has provided some relief for the beleaguered yen, which has traded within the 152 to 154 per dollar range for much of the week. This stability follows discussions about rate checks by U.S. and Japanese authorities last week, often viewed as a precursor to potential intervention.
Goldman Sachs noted in a report that coordinated action by Japan’s Ministry of Finance and the U.S. Treasury could mitigate near-term downside pressure on the yen. However, they cautioned that such effects would only be sustainable if supported by disinflation-friendly fundamentals, such as quicker tightening by the Bank of Japan or fiscal restraint measures.
Other Currency Movements
In other forex developments, the Canadian dollar strengthened by 0.4% against the U.S. dollar on Thursday, a day after the Bank of Canada held its policy rate at 2.25%, as widely anticipated by markets.
Meanwhile, leading cryptocurrency bitcoin fell 6% to $83,563 on Thursday, mirroring sell-offs in riskier assets like stocks, as investor risk appetite waned amid broader market uncertainties.
