The dollar, encouraged by strong U.S. economic data, reached a one-month high against a basket of major currencies, but given the Federal Reserve’s emphasis on reducing inflation, its gains appear overdone.  

Earlier this week, the Federal Reserve delivered a clear message: if inflation continues to decline, little resilience in activity statistics won’t prevent cuts. The DXY weekly gains stood at 0.9 percent to 104.095 index points, while EUR/USD fell to a three-week low of 1.0817.  

While one member chose a higher path for interest rates this year and the median has been upgraded for 2025 and 2026, the tone was dovish. Fed Chair Jerome Powell stated on Wednesday that the narrative of the Fed’s gradual easing of U.S. policy has not changed despite recent high inflation readings. 

Fed decision-makers now anticipate the U.S. economy to expand by 2 percent in 2024, far above its long-term potential and a significant improvement over the 1.4 percent growth recorded in December. 

This week, the Federal Reserve maintained its three rate reductions by year-end projections and held the funds rate at a range of 5.25 to 5.5%. Yet, it added that it will hold off on acting until it is more certain that inflation is steadily declining to two percent. Compared to the 160 basis points that were priced in at the beginning of the year, only about 80 basis points of cuts are now anticipated for this year. 

The dollar strengthened during the week’s final trading session following the surprise interest rate cut by the Swiss National Bank, which boosted global risk sentiment and highlighted the appeal of the greenback amid strong U.S economic growth Sterling declined following the anticipated hold of the Bank of England’s benchmark interest rate.  

However, risk assets surged globally and the outlook for investment flows to the U.S. improved after the Federal Reserve announced on Wednesday that it would adopt a less restrictive policy stance than anticipated.