In the ongoing negotiation between inflation and growth, currency markets on Wednesday reflected a quieter but significant shift: the Federal Reserve, once expected to raise rates in October with near-even odds, now faces only a one-in-five chance of doing so, as softer economic data has granted policymakers — and the dollar — a moment of pause. Across the Atlantic, French political ambitions reshaped the euro's trajectory, while in Tokyo, a new voice at the Bank of Japan spoke of gradual tightening into a market already thick with uncertainty. The dollar's modest retreat is less a defeat than
Dollar Weakens as Markets Await Fed Minutes Amid Rate Hike Uncertainty
Less urgency on the Fed to hike after softer data
Mark
So the dollar fell because the Fed might not raise rates in October. But why does that make the dollar weaker? Shouldn't a pause be good for the dollar?
Mimi
Actually, it's the opposite. When the Fed raises rates, it makes dollar-denominated assets more attractive—higher returns. When rate hike odds fall, that appeal diminishes, so the dollar tends to weaken.
Luke
But the dollar index only moved 0.03% on the day. That's basically flat. The real story is the euro surging 0.27% the day before. That's not really about Fed expectations—that's about French politics and Le Pen's spending cuts.
Mimi
Right. The euro rallied because French bond yields fell when Le Pen raised her spending cut target. That's a separate driver.
Mark
And the yen? It weakened even though a BOJ official said she supports rate hikes. That seems backwards.
Luke
It does. The source doesn't explain why the yen weakened despite the dovish signal. That's a gap in the reporting. We know it happened, but not the mechanism.
Mimi
The BOJ official said she supports rate hikes in stages, but the market may have interpreted that as gradual, not imminent. The BOJ might signal this month that inflation has hit its 2% target, which could mean rate hikes are coming—but later, not now.
Mark
So October rate hike odds fell from 51% to 20.5% in a week. That's a massive swing. What caused it?
Luke
The source says softer PCE and jobs data. But it doesn't give the actual numbers or dates. We know the data came in lower than expected, but we don't know by how much or exactly when.
Mimi
The shift is real though. Markets went from seeing a coin flip on October to seeing it as unlikely. December odds are now 84.5%.
Mark
Does that mean the Fed will definitely hike in December?
Luke
No. It means markets are pricing in an 84.5% probability. That's not a certainty. And the source notes that Fed Chair Warsh hasn't given clear forward guidance, so markets are reacting sharply to each data point and speech. That volatility could continue.
El Pulso
- Rate hike odds for October have collapsed from 51% to 20.5% in a single week, as weaker jobs and spending data drained urgency from the Fed's inflation fight.
- The dollar index barely moved Wednesday, masking the turbulence beneath — the euro had just posted its biggest single-day surge in seven weeks on French fiscal news, while the yen slipped despite a new BOJ official signaling rate increases ahead.
- Kansas City Fed President Schmid broke from the cautious chorus, insisting rates must still rise further even as long-term yields create economic headwinds — a lone hawk in an increasingly patient flock.
- Markets are now betting heavily on December — an 84.5% probability — suggesting the Fed may pause now but resume tightening later, leaving every data release and policymaker speech as a potential market-moving event.
- Currency strategists warn that without clear forward guidance from Fed Chair Warsh, markets will continue to swing sharply on each new signal, keeping volatility elevated across currencies, bonds, and even crypto.
In the ongoing negotiation between inflation and growth, currency markets on Wednesday reflected a quieter but significant shift: the Federal Reserve, once expected to raise rates in October with near-even odds, now faces only a one-in-five chance of doing so, as softer economic data has granted policymakers — and the dollar — a moment of pause. Across the Atlantic, French political ambitions reshaped the euro's trajectory, while in Tokyo, a new voice at the Bank of Japan spoke of gradual tightening into a market already thick with uncertainty. The dollar's modest retreat is less a defeat than a recalibration — markets learning, again, that the path of monetary policy is rarely a straight line.
The dollar slipped Wednesday as currency traders recalibrated their expectations for Federal Reserve rate hikes, with attention shifting to the central bank's policy minutes and a series of scheduled policymaker speeches. The move reflected a broader repricing: just a week ago, markets had assigned a 51% chance of an October rate hike. By Wednesday, that figure had fallen to 20.5%, driven by softer-than-expected personal consumption expenditures and nonfarm payroll data suggesting the economy was cooling and the Fed had less reason to act urgently.
The dollar index edged up just 0.03% to 101.94 after falling the session prior. The euro, meanwhile, had surged its most in seven weeks on Tuesday after French presidential frontrunner Marine Le Pen raised her spending-cut target to €140 billion, easing pressure on French bond yields and lifting the common currency. The yen weakened slightly despite a new Bank of Japan official signaling support for gradual rate increases, and sterling dipped modestly.
The Fed had raised rates at its September meeting, but recent policymaker commentary had grown less aggressive — with one notable exception. Kansas City Fed President Jeff Schmid argued Tuesday that rates still needed to rise further to tame inflation, even as higher long-term yields were already weighing on parts of the economy. His colleagues Christopher Waller, Neel Kashkari, and Alberto Musalem were set to speak later in the day, with markets hanging on every word.
With December now carrying an 84.5% probability of a hike, the prevailing view was that the Fed would pause in October and resume tightening later in the year. Currency strategist Samara Hammoud of Commonwealth Bank of Australia noted that without clearer forward guidance from Fed Chair Kevin Warsh, markets had become acutely sensitive to each data point and speech. The dollar's retreat, in the end, was not a rout — it was a market pausing to breathe, waiting for the next signal in an uncertain monetary landscape.
The dollar slipped lower on Wednesday as currency traders and investors recalibrated their bets on when the Federal Reserve might raise interest rates again. The shift came as stress in European bond markets eased and attention turned to the central bank's policy minutes and scheduled remarks from its officials—all potential signals about the path forward on inflation.
Just a week earlier, markets had priced a 51% chance that the Fed would hike rates in October. By Wednesday, that probability had collapsed to 20.5%, according to CME FedWatch data. The reason was straightforward: recent economic reports had come in softer than expected. Personal consumption expenditures data and nonfarm payroll figures suggested the economy was cooling, which meant the urgency to raise rates to combat inflation had diminished. Gavin Friend, a senior markets strategist at National Australia Bank, captured the shift plainly: there appeared to be less pressure on the Fed to act after those weaker readings.
The dollar index, which tracks the greenback against a basket of major currencies, rose just 0.03% to 101.94 on the day, having fallen 0.27% the previous session. The euro eased slightly to $1.1249, but the currency had surged in the prior trading day—its biggest move in seven weeks—after French political developments suggested potential fiscal tightening. Marine Le Pen, the far-right presidential frontrunner for France's 2027 election, had raised her target for spending cuts to €140 billion from €125 billion, which sent French bond yields lower and supported the euro. The Japanese yen weakened 0.19% to 158.43 per dollar, even as Ayano Sato, a new Bank of Japan policymaker, signaled support for raising interest rates in stages. Sterling dipped 0.08% to $1.3262.
The broader context was one of global monetary policy in flux. Bond yields worldwide had climbed in recent weeks as investors braced for central bank rate increases, but the picture had grown murkier. The Fed had raised rates at its September 15-16 meeting to address inflation, yet recent comments from policymakers had sounded less aggressive. Kansas City Fed President Jeff Schmid was an exception, saying Tuesday that the central bank still needed to raise its policy rate further to bring inflation down, even if higher long-term yields were creating headwinds in parts of the economy. But his voice stood apart. Fed officials Christopher Waller, Neel Kashkari, and Alberto Musalem were scheduled to speak later Wednesday, and their remarks would be parsed for any additional clues.
Markets had begun pricing in an 84.5% probability of a December rate hike, suggesting the Fed might pause in October but resume tightening later in the year. Samara Hammoud, a currency strategist at Commonwealth Bank of Australia, noted that without clear forward guidance from Fed Chair Kevin Warsh, markets had swung sharply on each economic data release and policymaker comment. Her team expected the Fed to hold off until December before moving again. The central bank was also due to release consumer credit data on Wednesday, expected to show a decline to $15 billion in August from $18.06 billion in July—another potential signal of cooling demand.
Currency moves reflected the uncertainty. The Australian dollar weakened 0.04% to $0.6979, while the New Zealand dollar slid 0.07% to $0.5617. In cryptocurrencies, bitcoin fell 0.22% to $85,438.59 and ether declined 0.12% to $2,695.22. The dollar's weakness was not a collapse but a recalibration—a market repricing its expectations as the economic picture shifted and central banks signaled they might have room to breathe before tightening further.
Citas Notables
There seems to be a little bit less urgency on the Fed to hike rates after the softer PCE and then the nonfarm payroll reports recently.— Gavin Friend, senior markets strategist, National Australia Bank
Without clear forward guidance from Chair Kevin Warsh, markets have reacted sharply to each US data release and policymaker speech.— Samara Hammoud, currency strategist, Commonwealth Bank of Australia
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