The US dollar (USD) weakened against most major currencies in Friday trading, following Federal Reserve Chairman Jerome Powell's speech at the annual Jackson Hole forum. Powell's dovish tone further strengthened market confidence that the central bank would soon ease monetary policy, with the odds of an interest rate cut in September now approaching 90%.

Powell Signals Easing

In his speech, Powell acknowledged that the US labor market is currently showing significant signs of weakness. He described this condition as a "strange balance" because the decline is occurring on both the supply and demand sides of labor. Although inflation remains above the 2% target, Powell believes the slowdown in the employment sector provides room for the Fed to cut interest rates without risking higher inflation.

This dovish tone was immediately interpreted by the market as a strong signal that the Fed will take monetary easing steps sooner than previously expected. According to the CME FedWatch Tool, the probability of a 25 basis point interest rate cut at the September FOMC meeting rose sharply from 74% to nearly 90% after the speech.

Markets React Positively

The global financial market reaction was swift. The yield on the 10-year US Treasury bond fell significantly, while the dollar index (DXY) corrected after hitting its highest level in 10 days. The weakening dollar immediately boosted gold prices, which rebounded above $3,329 per ounce, and boosted other major currencies such as the euro, yen, and Swiss franc.

The stock market also surged. The S&P 500 index rose around 1.6%, while the Russell 2000 index, which includes small-cap stocks, surged 3.6%. The housing sector, which is highly sensitive to interest rate changes, even rose around 4.5%.

Structural Pressures on the Dollar

In addition to Powell's speech, the dollar's weakening was also triggered by structural conditions. Several analysts noted that interest rate cuts in the US are expected to occur more rapidly than those of other major central banks, such as the ECB (Europe) and the Bank of Japan (BoJ). This policy imbalance has led global investors to reduce dollar exposure in their portfolios.

Bank of America added in its report that increased currency hedging practices by foreign investors have also depressed demand for the dollar. Many global financial institutions have begun shifting some of their dollar-denominated assets to gold and bonds from other countries to protect themselves from the risk of further weakening.

The Fed's Challenges Ahead

Although the market has welcomed the Fed's looser policy stance, significant challenges remain. US inflation remains persistently above its 2% target, partly due to the impact of the Trump administration's increased import tariffs. This could limit the Fed's room to aggressively lower interest rates.

Furthermore, political pressure on the central bank is increasing. President Trump's open criticism of the Fed and threats to fire one of its governors have raised questions about the institution's independence. This political uncertainty is an additional factor that has the potential to destabilize global financial markets.

Conclusion

Today's US dollar weakness is primarily due to a combination of fundamental factors: dovish signals from Jerome Powell at Jackson Hole, rising expectations of an interest rate cut in September, declining bond yields, and structural changes in global capital flows. While the short-term trend points to downward pressure on the dollar, its future direction depends heavily on subsequent US economic data, particularly inflation and employment, and the extent to which the Fed is willing to ease monetary policy amid political pressure and global geopolitical risks.

Source: Newsmaker.id