Fed Pause Sparks Dollar Weakness Amid Credibility Concerns

The US Dollar saw modest weakness following the Federal Reserve's decision to leave interest rates unchanged. However, the lack of clear justification for this pause by Fed Chair Warsh led to a sell-off in long-term US Treasuries and increased uncertainty over the Fed's reaction function.

According to MUFG's Derek Halpenny, the failure to provide a clear explanation has raised questions about Fed credibility. He notes that inflation expectations have jumped, which is a negative sign for the Dollar.

The 2s10s spread, which measures the difference between short-term and long-term interest rates, saw its biggest jump since August last year. This steepening of the yield curve points to further depreciation risks for the US Dollar.

Halpenny suggests that the outcome of the Fed meeting is certainly Dollar-negative, citing a potential more laissez-faire approach from Warsh as a reason for increased risks of the Fed ending up behind the curve.