The U.S. dollar entered Thursday still fragile as markets continued to weigh divergent policy messages and geopolitical developments following a recent bout of heavy selling.
On monetary policy cues, the Federal Reserve adopted a more cautious tone about the U.S. labour market and inflation risks overnight. Market participants read the comments as increasing the probability that interest rates could remain unchanged for a longer period.
That softer Fed messaging came against a backdrop of political and diplomatic statements. The currency plunged earlier in the week to a four-year low after U.S. President Donald Trump appeared to downplay concerns about the dollar's weakness. The decline eased, however, when Treasury Secretary Scott Bessent later stated that Washington maintains a "strong-dollar policy," a remark market participants treated as a deliberate reassurance.
The euro, which had pushed above the key $1.20 threshold during the dollar's downturn, was trading just below that mark at $1.1979 in Asian trade. Officials at the European Central Bank have signalled rising worry over the currency's rapid appreciation, creating further layers for market participants to assess.
"It was a timely comment from Bessent that you’d assume was premeditated, if you’d like," said Ray Attrill, head of FX strategy at National Australia Bank. "I think the ECB comments are independent, but it’s interesting that with euro/dollar, $1.20 does seem to have been a little bit of a trigger."
"You could argue that... the euro/dollar move, which up until recently, hasn’t been that great, is kind of masking broader euro strength. And that will feed into the ECB’s inflation forecasts."
Although the intense dollar selling eased on Thursday, the currency remained on the defensive across several peers. It slid 0.5% against the Swiss franc to 0.7656, near an 11-year low, while sterling was close to a 4-1/2-year high at $1.3826.
The Australian dollar climbed to a three-year high of $0.70495, buoyed partly by market bets on a potential rate increase at home as soon as next week. The New Zealand dollar also reached a multi-month peak, touching $0.60695, while the offshore Chinese yuan strengthened slightly to 6.9426 per dollar after earlier hitting its strongest level since May 2023.
Market observers noted the recent dollar rout was the steepest since last April, when earlier U.S. tariff measures unsettled markets. Year to date, the dollar had declined roughly 2%, a slide analysts linked to mounting concerns about erratic policymaking in Washington, public criticism aimed at the Federal Reserve, and related uncertainty over the trajectory for interest rates.
Those concerns were compounded by reports that the United States was prepared to sell dollars to assist Japan in lifting the yen, a signal that may have intensified the recent moves.
NAB's Attrill stressed the wider significance of potential threats to U.S. central bank independence. He said the dollar's prospects hinge on how questions around Fed autonomy play out, including a pending U.S. Supreme Court matter concerning President Trump’s effort to remove Fed Governor Lisa Cook.
"Loss of independence is far and away the biggest risk to ongoing dollar hegemony," Attrill said.
Against a broad basket of currencies, the dollar stood at 96.24, remaining close to Tuesday’s four-year low of 95.566. The recent depreciation offered some relief for the Japanese currency, which rose 0.12% to 153.21 per dollar on Thursday. The yen has traded in a roughly 152-154 per dollar range for much of the week amid discussion of "rate checks" by U.S. and Japanese officials last week, a development often seen by markets as a precursor to intervention.
Overall, the week’s moves underscore a market environment where central bank rhetoric, governmental assurances and geopolitical signals interact in shaping short-term currency trajectories. Traders and policy watchers will likely continue to monitor official comments and legal developments related to central bank governance as key inputs for the dollar’s near-term path.