Limited Movement by the Dollar After Inflation Meets Expectations
News Summary
The US dollar remained broadly stable against most major currencies after American inflation data on September 11, 2025, met expectations. Participants are convinced the Fed will cut rates on September 17 due to significantly weaker recent job data. A large majority expects the Fed to cut three times before year-end, with around 80% probability. American annual headline inflation rose to 2.9% in August as expected. Tariffs passed on to consumers appear to be a major driver of higher inflation. While figures haven't risen more than expected, the justification for cutting rates from inflation alone isn't there, as annual non-core inflation is nearly a full percent above the traditional target. Conversely, the US job market is much weaker than previously appeared. August NFP was much worse than expected at 22,000 against a consensus of 75,000. This follows significant downward revisions, with 911,000 fewer jobs added in the 12 months to March 2025 than initially reported—the largest revision in at least 25 years. This weakness reinforces confidence in looser monetary policy. Gold reached a new all-time high of $3,645 on September 10, driven by shifting expectations towards a more dovish Fed. The Euro-dollar pair has been relatively stable in September, despite increased dovish expectations for the Fed. The ECB might have ended its policy loosening cycle, but US and Eurozone rates are unlikely to equalize before spring 2026.
Background
The current year is 2025, and Donald J. Trump is the incumbent US President. The Federal Reserve's monetary policy decisions are heavily influenced by inflation and employment data, with traditional targets of 2% inflation and maximum employment. The article discusses the August 2025 US inflation figures and Non-Farm Payrolls, which are critical economic indicators for the Federal Reserve's interest rate decisions. The Fed's policy trajectory has profound implications for global financial markets, particularly the US dollar's value, gold prices, and major currency pairs like EUR/USD. The recent significant weakening of job data contrasts sharply with earlier market narratives this year that suggested the Fed would postpone rate cuts. Gold is often viewed as a hedge against inflation and currency debasement, and its price movement typically exhibits an inverse relationship with the dollar and interest rate expectations.
In-Depth AI Insights
Why is the Fed seemingly prioritizing job market weakness over persistent above-target inflation, and what are the long-term implications for its credibility? - The Fed appears to be prioritizing structural weakness in the job market over short-term inflation. The largest downward revision to NFP in at least 25 years suggests deeper underlying issues in the labor market, not just transient fluctuations. In this context, the Fed might be more concerned about the risk of a 'hard landing' for the economy than inflation slightly above target. - There could also be political pressure from the Trump administration to maintain economic growth and low unemployment, potentially pushing the Fed towards a more dovish stance, especially during an election cycle. - Long-term, if the Fed is perceived as compromising its 2% inflation target commitment for short-term economic stability, it could erode its credibility and potentially lead to entrenched inflation expectations, resulting in higher inflation volatility and asset price distortions. Given strong rate cut expectations, why is the dollar's movement described as 'limited,' and what does gold's record high truly signal about investor sentiment? - The dollar's limited movement may suggest that much of the Fed's dovish expectation is already priced into the market. Furthermore, other major central banks, like the ECB, might also be nearing the end of their loosening cycles, which limits the widening of rate differentials and thus curbs significant dollar depreciation. - Gold's record high, conversely, reflects deep-seated investor concerns about inflation, currency debasement, and broader economic uncertainty. As a safe-haven asset, gold's surge signals not merely a hedge against a weaker dollar but a distrust in global monetary policy management and macroeconomic stability, indicating fundamental doubts about central banks' long-term ability to manage the economy. With the ECB potentially ending its loosening cycle and the Fed cutting rates, how might this reshape the global monetary policy landscape and capital flows? - The divergence in monetary policy cycles, with the ECB potentially tightening while the Fed loosens, suggests that the Euro could gain some short-term support against the dollar, though the article notes rate equalization is unlikely before spring 2026. This divergence will influence cross-border capital flows, as capital may reallocate to regions offering higher yields or more stable policy environments. - Investors should closely monitor how this policy divergence impacts various asset classes: for instance, fixed income markets may adjust due to changing rate differentials; equity markets could reprice based on evolving liquidity expectations; and emerging markets might benefit from a weaker dollar and improved global liquidity. This necessitates a more selective investment strategy rather than blindly following a single trend.