05.02.202616:25 Analisis Forex & Kajian: Where will the dollar end up? Funds rate will decide its fate

The US dollar continues to strengthen, reaching a two-week high amid renewed volatile moves in financial markets. Over the past two days, the dollar index (DXY) has risen by roughly 0.2%, letting it hold around 97.8 and extending its bullish momentum.

The main drivers of dollar strength are macroeconomic developments and events in European currency markets. Key factors supporting the US currency include central bank decisions, economic instability and market reactions to global risks.

European central banks: ECB and Bank of England decisions

Recent decisions by European central banks had a notable impact on FX. The dollar gained following a European Central Bank meeting in which the ECB opted to keep interest rates unchanged. In an environment of global uncertainty and geopolitical risk, the ECB stressed caution in its monetary policy. Nevertheless, with no rate moves, the outlook for the euro remains constrained.

Another important event was the Bank of England's decision to hold rates at 3.75%. The vote was narrowly split — 5 to 4 — and the outcome sent sterling sharply lower, down about 0.7% on the day versus the dollar and euro. The pound fell below $1.36, adding pressure to the British currency. Political instability in the UK, including controversy over Peter Mandelson's nomination as ambassador to the US, also weighed on the pound.

These developments underscore how central?bank decisions drive currency markets. In the pound's case, economic policy and political instability have a direct impact on the exchange rate, which in turn supports the dollar.

Risk aversion is rising

One of the week's notable trends has been a decline in risk appetite. This is especially visible amid volatility in the US stock market, where investors — despite relatively strong corporate results — have adopted more cautious stances. Equity?market volatility feeds demand for safe-haven assets, and in times of uncertainty and economic risk, the dollar traditionally benefits.

Sim Mo Siong, FX strategist at OCBC, noted that in risk-off periods, the dollar typically strengthens. That reflects its reserve currency status and the high demand for safe assets when global political and economic risks rise.

The question of Federal Reserve independence and expectations about future US monetary policy remain a key factor shaping the dollar. While the ECB and the BoE held rates steady, market attention is fixed on potential Fed actions that could move the dollar.

Although current pricing still assumes the Fed may keep rates high, talk of eventual rate cuts is increasing. In the face of economic fragility and political risk, traders have begun to price in a softer Fed stance, which also influences the dollar.

The Fed may face pressure to ease if US economic conditions deteriorate further, potentially prompting rate cuts. For now, however, confidence in the US economy's resilience has so far supported the dollar and prevented a sharp weakening.

Focus on US labor data

In the coming days, markets will watch weekly initial jobless claims (published today). Claims are forecast to rise to about 212k, slightly above last week's 209k. These figures are an important indicator of labor market health and can influence expectations of the funds rate.

Although the labor market has shown modest fluctuations, the US economy still displays significant resilience, which bolsters investor confidence in the dollar. Jobless claims prints may drive short-term FX moves, but overall the situation appears stable.

Outlooks and key factors for the dollar

Markets continue to monitor geopolitical developments and central?bank decisions. Despite easing inflation in the eurozone, the ECB has kept rates at relatively low levels, making the euro less attractive than the dollar. Political turmoil in the UK and uncertainty in US financial markets keep the dollar in a defensive, safe-haven role.

Markets are also awaiting a new batch of economic data such as GDP and inflation — strong prints could further bolster the US dollar. At the same time, the timing of Fed rate cuts remains an open question, which could drive additional volatility in FX markets.