The U.S. dollar recovered some footing on Wednesday after tumbling to a four-year low overnight. The sudden slide intensified on Tuesday amid a wave of selling, and the currency's weakness drew an unusually upbeat public reaction from President Donald Trump, who said the dollar was "great" and that it should "just seek its own level."
Investors are trying to reconcile those remarks with more muted signals from officials in Washington. Treasury Secretary Scott Bessent has said little publicly since U.S. authorities, on Friday, joined Japan in what was described as a 'rate check' of the dollar/yen rate - an intervention that helped precipitate the latest leg down in the greenback and contributed to a broader, global move lower for the currency.
As markets look for clarity, the U.S. Federal Reserve is set to announce its first policy decision of the year later on Wednesday afternoon. The Fed's stance will be examined closely in light of renewed dollar weakness, which could complicate the central bank's assessment of imported inflation. A softer dollar tends to push up the U.S. price level for imported goods, a dynamic that could add to the inflationary effects already expected from tariffs.
Currency moves have a knock-on effect across markets. Oil prices have rebounded alongside the dollar slide, and gold has surged to new records - trading above $5,300 per ounce today. One-month implied currency volatility has climbed to its highest level since July, reflecting heightened uncertainty in FX markets.
European reactions also helped cool the dollar selloff on Wednesday. The euro vaulted past $1.20 for the first time in four years, prompting speculation that the European Central Bank may face renewed pressure to consider another rate cut later in the year. Austria's central bank governor Martin Kocher warned that the ECB would need to react if the euro continues to appreciate, underscoring how moves in one major currency can prompt policy scrutiny in another jurisdiction.
A central worry among market participants is how a further sharp drop in the dollar might affect foreign holders of U.S. assets. Large-scale foreign exposures to U.S. securities could be disrupted by rapid exchange-rate moves, a prospect that has prompted attention amid the recent spike in FX volatility. Equities on Wall Street, however, initially appeared unperturbed by the dollar's weakness and climbed on Tuesday, with investors viewing a softer dollar as beneficial for overseas earnings of U.S. multinationals.
Optimism in equity markets was supported by expectations of megacap corporate results due after the bell on Wednesday, including reports from Microsoft, Meta and Tesla. Other notable corporate releases on the calendar include earnings from IBM, AT&T and United Rentals.
Treasury markets reacted differently to the currency and commodity moves. Long-term U.S. yields rose in response to the dollar slide and the oil price rebound, before stalling as new data showed a sharp fall in consumer confidence. U.S. consumer sentiment plunged to its lowest level in more than 11 years in January amid growing concerns over a softening labor market and elevated prices, a development likely to be a political worry for the administration in an election year.
Chart of the day
U.S. consumer confidence slumped to its lowest level in more than 11-1/2 years in January, reflecting mounting anxiety about a sluggish job market and persistent high prices.
This slump in sentiment is likely to command attention in policy and political circles, given its potential implications for consumer spending and the broader economy.
Events to watch
- U.S. Federal Reserve policy decision (2:00 PM EST) and Chair Jerome Powell's press conference (2:30 PM EST)
- Bank of Canada policy decision (9:45 AM EST)
- U.S. corporate earnings: Meta, Microsoft, Tesla, IBM, AT&T, United Rentals
- British Prime Minister Keir Starmer's three-day visit to China
As the dollar's recent moves continue to reverberate, market participants will be watching central bank signals and economic data closely for clues on how policy makers intend to respond to currency-driven pressures on inflation and asset valuations.