Dollar Drops Sharply After Fed Keeps Interest Rates Steady

The Federal Reserve kept interest rates steady, but its decision sparked a sharp decline in the US dollar, particularly against the yen. This development has been attributed to 'Warshspeak,' a term used to describe the Fed's ambiguous communication style under Chairman Kevin Warsh. Unlike his predecessor Alan Greenspan, who was known for providing enough information to shape expectations without committing to a specific policy path, Warsh is taking a more volatile approach by offering less guidance and pushing market pricing and incoming data to drive decisions.

The lack of clear signals from the Fed contributed to a steep decline in the dollar index (DXY), which fell about 1.5% over two days, erasing its July gains and marking its worst two-day drop since April 2025. The curve reaction was also notable, with the front end rallying on no hike and no near-term signal while the long end pushed back against inflation-credibility risk.

Meanwhile, the European Central Bank (ECB) has been closely watching developments in the US, particularly as it considers its own monetary policy. The euro has risen to one-month highs, with EUR/USD pushing above 1.15 as broad dollar weakness gathers momentum. This rally has been driven by a sharp decline in USD/JPY, which has weighed heavily on the dollar more broadly.

The Bank of England (BoE) also kept interest rates unchanged at 3.75%, but the decision was closely contested, with a 6-3 vote split. The BoE's inflation forecast suggests that UK inflation is still expected to peak at 3.2% in Q4 2026.