Dollar Down, US Market Up; Why Fed Policy, China-US Trade Talks Potential Is Dragging USD?

The US Federal Reserve has kept interest rates unchanged to 4.25% to 4.5% for the third time, on an expected lines. This turned as good news for US market, but a dagger to US Dollar. The greenback has witnessed a volatile 2025 so far, and its woes are only going to deepen.

Another key positive for market is potential of trade talks between US and China, two economical behemoths who don't meet an eye to eye, as history tells the tale. But that is also another sour situation for dollar.

US Stock Market:

The Dow Jones climbed 0.70% to end at 41,113.97, while Nasdaq Composite edged higher by 48.50 points or 0.27% to close at 17,738.16, and S&P 500 picked up by 0.4% to finish at 5,631.28. Investors cheered FOMC's policy outcomes on May 7.

"As Asian equities are trading in the green mirroring overnight gains in the US markets, domestic equity indices too could see a steady positive start in the backdrop of the ongoing Indo-Pak tensions. However, the street will react to Jerome Powell's statement on higher tariffs after Fed's decisions to keep interest rates unchanged," Prashanth Tapse, Senior VP (Research), Mehta Equities said.

He added the street will now hope for some fruitful trade discussions between the US and China when they meet this weekend.

US Dollar Index:

Accordingly, the US dollar struggled to hold around 99.6 on Thursday's early trade, reversing its gains from the previous session. Other currencies like the euro, GBP, and AUD are strengthened against the dollar.

Euro climbed to hold $1.13, almost near its 3-year high that was touched in April. British Pound also climbed by 0.4%, while Australian dollar climbed above $0.645. These currencies have broadly strengthened due to weakness in dollar.

Why US Dollar Is Being Dragged?

Sentiment in dollar soured as market participants digested the Federal Reserve's latest policy stance and looked ahead to high-level trade talks between the US and China.

As expected, the Federal Reserve held interest rates steady, but Chair Jerome Powell struck a cautious tone, citing heightened risks to both inflation and unemployment. He also rejected the notion of a preemptive rate cut to offset any potential economic fallout from President Donald Trump's proposed tariffs. On the trade front, Treasury Secretary Scott Bessent and U.S. Trade Representative Jamieson Greer are scheduled to meet their Chinese counterparts in Switzerland this weekend to discuss trade issues, as per Trading Economics data.

However, President Trump stated he would not consider easing tariffs as a prerequisite for beginning talks. The dollar weakened broadly, posting the largest losses against the British pound, Australian dollar, and New Zealand dollar, it added.

On May 7th, during the late hours, chair Jerome Powell led FOMC decided to maintain the target range for the federal funds rate at 4-1/4 to 4-1/2 percent. FOMC said, " The Committee is strongly committed to supporting maximum employment and returning inflation to its 2 percent objective."

"Although swings in net exports have affected the data, recent indicators suggest that economic activity has continued to expand at a solid pace. The unemployment rate has stabilized at a low level in recent months, and labor market conditions remain solid. Inflation remains somewhat elevated," Fed said.

Solutions between US-China could ease trade tensions, which would most likely minimise the impact on inflation, and giving more room to Fed in cutting rates accordingly. A rate cut comes as a drawback for dollar, but a boon for safe haven assets.

FOMC said, it seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. Uncertainty about the economic outlook has increased further. The Committee is attentive to the risks to both sides of its dual mandate and judges that the risks of higher unemployment and higher inflation have risen.

Fed has hinted that its in no hurry for rate cut, while market is predicting rate cut in the second half of 2025.