Dollar Set for July Gain as Fed Holds Rates, Trump Tariffs Uncertainty Fades

The dollar is poised to achieve its first monthly increase of the year in July, as the Federal Reserve maintains a cautious stance on interest rate cuts and the Bank of Japan keeps its interest rate unchanged while raising its inflation forecast. The uncertainty surrounding Trump's tariffs has gradually dissipated, contributing to this positive outlook for the dollar.

The Federal Reserve, under the leadership of Chairman Powell, has consistently adopted a cautious approach to interest rate cuts. This stance has been bolstered by strong economic data from the United States, including a robust increase in ADP employment numbers for July and a 3% economic growth rate for the second quarter. Powell avoided providing any guidance on a potential September rate cut, opting instead for a wait-and-see approach. This decision has led to a continuous rise in the dollar index, which has been trading near its two-month high.

The Federal Reserve's decision to keep the federal funds rate target range unchanged at 4.25% to 4.50% was widely anticipated by investors. The market expected the Fed to maintain the rate with a probability of nearly 98%, and the probability of a rate cut in the next meeting in September was around 65%. Prior to the Fed's announcement, both the U.S. Treasury Secretary and President Trump had predicted that the Fed would not cut rates at this meeting.

The internal divisions within the Federal Reserve became a more significant point of interest than the decision itself. Two Federal Reserve officials supported a rate cut during this meeting, marking the highest number of dissenting votes since the Fed initiated its rate-cutting cycle ten months ago. The Fed's statement noted that the unemployment rate remains low and the labor market is stable. Inflation is slightly above target levels. The statement also highlighted that economic growth has slowed in the first half of the year, which could strengthen the case for a rate cut in future meetings if this trend continues. However, the statement emphasized that uncertainty about the economic outlook remains high, and both inflation and employment targets face risks. This language suggests that the Fed is reluctant to act prematurely until the paths of inflation and employment become clearer.

During a subsequent press conference, Powell stated that while economic growth has slowed, the Fed is prepared to take necessary actions. He stressed that the central bank has not made any decisions regarding potential policy adjustments in September. Powell also noted that the Fed needs to ensure that Trump's tariff policies do not become a significant driver of inflation. The Fed's decision to maintain the benchmark interest rate comes amid ongoing pressure from President Trump to ease monetary policy. Powell has consistently maintained that any decision to lower the current overnight rate of 4.25% to 4.5% will be based solely on data performance.

The Fed's decision to keep rates unchanged for the fifth consecutive meeting was met with two dissenting votes from officials who advocated for an immediate rate cut. One decision-maker was absent from the meeting and did not delegate a vote. The Fed's statement indicated that economic activity growth has slowed in the first half of the year, and uncertainty about the economic outlook remains high. The main changes included modifying the statement to reflect that recent indicators show economic activity growth has slowed in the first half of the year, and that uncertainty about the economic outlook remains high.

Powell emphasized during the press conference that the Fed is prepared to take necessary actions if economic conditions warrant it. He noted that the current monetary policy stance allows the Fed to respond promptly to potential economic changes. Powell also highlighted the need to monitor the impact of Trump's tariff policies on inflation, stating that the Fed must ensure that these policies do not lead to sustained inflation. The Fed's next meeting is scheduled to take place in Jackson Hole, Wyoming. Powell's press conference focused on the Fed's readiness to act if necessary, while avoiding any specific guidance on a September rate cut. He noted that the Fed will consider all available data between now and the next meeting in September to make an informed decision.

Powell also addressed the impact of tariffs on inflation, stating that while some commodity prices have already reflected higher tariffs, the overall impact on economic activity and inflation remains to be seen. He noted that core inflation, which excludes volatile food and energy prices, has been influenced by tariffs, with 30% to 40% of core inflation attributed to tariffs. Powell suggested that the impact of tariffs on inflation could be temporary. The Fed's decision to maintain rates has had a significant impact on the market. Following Powell's press conference, U.S. stocks, bonds, and gold prices all declined. The Dow Jones Industrial Average fell by 171.71 points, or 0.38%, to 44,461.28 points. The S&P 500 index declined by 7.94 points, or 0.12%, to 6,362.92 points. The Nasdaq Composite Index rose by 31.38 points, or 0.15%, to 21,129.67 points.

The dollar index rose by approximately 0.9%, reaching a daily high of 99.881 points. The yield on 10-year U.S. Treasury notes increased by 5.16 basis points to 4.3720%, while the yield on 2-year Treasury notes rose by 6.56 basis points to 3.9365%. Gold prices fell by 1.57% to $3,274.03 per ounce, and the Philadelphia Gold and Silver Index declined by 3.34% to 204.07 points. Analysts have noted that the Fed's decision to maintain rates reflects its cautious approach to monetary policy. While the Fed has not provided specific guidance on future rate cuts, it has indicated that it will closely monitor economic data and be prepared to act if necessary. The market's reaction to the Fed's decision has been mixed, with some investors expressing disappointment at the lack of clear guidance on future rate cuts, while others have welcomed the Fed's cautious approach.