FOMC holds but dollar fails to strengthen further

USD: FOMC hold with jobs market view upgraded

The US dollar has failed to extend further stronger after US Treasury Secretary Bessent’s comments provided an initial lift (see below). The focus last night was on the FOMC meeting and there was no surprise in the decision to keep the fed funds rate unchanged. There was also no surprise in Steve Miran dissenting from that majority vote calling for an immediate 25bp cut. A bit more of a surprise was the dissent from Christopher Waller who in 17^th December mentioned there was “no rush” in delivering the cuts he felt were still warranted. Of course his dissent is certainly a good indication that he remains in the running for the Fed Chair position after what was described in December as Waller having had “a strong interview” for the position.

The rates market reaction last night was very modest with a slight pick-up in 2-year yields before the move reversed. The main take-away from the meeting was the change in description of the labour market. The opening paragraph of the statement last night contained the description that “Jobs gains have remained low, and the unemployment rate has shown some signs of stabilization”. In December the view was that “Job gains have slowed this year, and the unemployment rate has edged up through September”. Signs of “stabilization” after the most recent unemployment rate fell 0.1ppt from the highest level since covid or before then the highest level since 2017 feels like a view that could be a little premature. The 3mth average for NFP continues to indicate job losses albeit less than in previous months so job market weakness is surely the more apt description for labour market conditions at this juncture.

Yields did retrace their modest bounce following the press conference so Fed Chair Powell’s comments were certainly a little less convincing on labour market stabilization and he did state that he “wouldn’t go too far with that” view. But the overall tone on growth was positive and Powell doesn’t appear to believe the monetary stance is overly restrictive stating that it was “at the higher end of a plausible range for the neutral rate” adding that the strength in GDP growth was not indicative of the monetary stance being “significantly restrictive”. So more cuts can come to get to neutral, but there’s clearly no rush.

There is now just 3bps of cuts priced for the March FOMC meeting. That could be viewed as a reasonably attractive risk-reward trade to position for a cut in March given we have two NFP and two CPI reports before that FOMC meeting. A cut certainly seems less likely following this FOMC meeting but the Fed is still driven by data and a couple of weak job reports and well-behaved CPI reports will see the probability of a cut rise considerably. While rate expectations have not been a catalyst for dollar selling in January the positioning now in rates should help limit the risk of a rebound in the dollar if/when rate expectations become a bigger influence on FX going forward. A rate cut is now not fully priced until July and we certainly see the FOMC moving before then, reinforcing downside risks for front-end yields going forward.

US CONSUMERS CONTINUE TO HOLD A NEGATIVE VIEW ON JOBS MARKET

Source: Bloomberg, Macrobond & MUFG GMR

USD: Debasement fears ease on Bessent comments

So, the US strong dollar policy remains intact! US Treasury Secretary Scott Bessent said so yesterday in a CNBC interview. The US “always has a strong dollar policy” Bessent stated but that’s because they aim to set sound economic policies and “if we have sound policies, the money will flow in”. But that logic is simply not right. A quick look at flows as reported from the US Treasury department shows the US drew USD 1,569bn of foreign capital into bonds and equities in the 12mths to November with US investor buying of foreign assets totalling around USD 300bn for a net inflow of over USD 1.2trn. It’s no coincidence that the total securities net inflow closely matches the overall trade deficit. We know that in 2025 the US dollar fell by close to 10% so there is not necessarily a link between the cross-border capital flows and the performance of the dollar.

Short-term bank lending flows, foreign investor hedging behaviour and speculative flows can play a key role in US dollar performance and when confidence is undermined, those flows can certainly fuel notable dollar depreciation. Given past capital inflows now means foreign investors own over USD 35trn of US securities, shifts in sentiment that fuels increased hedging can be meaningful. So Bessent’s explanation of why the US “always” has a strong dollar policy basically means it is meaningless.

Trump’s remarks about dollar weakness being “great” will likely resonate with investors given last year’s performance and given one of his key economic advisors, Steve Miran, (whose time on the Board of Governors will come to an end this week) firmly believes that reducing the huge trade imbalance in the US involves US dollar depreciation.

It’s not a surprise Bessent confirmed the US did not intervene in USD/JPY last week, but the Fed did reportedly check rates that had the intended impact of sharply weakening the dollar versus the yen. Coupled with Steve Miran being at the heart of Trump’s economic policymaking team and Trump’s view that the weakening dollar is “great”, it’s very unlikely that Bessent’s comments yesterday will have any lasting impact on lifting the US dollar. Multi-national corporations and investors are likely to continue reducing exposures to the dollar through increased hedge-related US dollar selling.

FOREIGN INVESTOR INFLOWS TO US BONDS AND EQUITIES HIT A RECORD IN 2025 AS THE DOLLAR FELL BY CLOSE TO 10%

Source: Bloomberg & MUFG Research

KEY RELEASES AND EVENTS

Source: Bloomberg & Investing.com