Dollar weakens after Powell's testimony to Congress. Was it something he said?

Around 6:31 am yesterday, approximately three and one-half hours prior to Federal Reserve Board chairman Jerome Powell's testimony before the U.S. House Committee on Financial Services, the price of the U.S. dollar in terms of the euro, British pound, Japanese yen, Canadian dollar, and the Eastern Caribbean dollar was as follows:

USD/EUR=0.9193

USD/GBP=0.7858

USD/JPY=149.7394

USD/CAD=1.3582

USD/XCD=2.70

As my family is from the Eastern Caribbean, pardon me if I express my soft spot for the currency and the region's connection to the United States. The U.S. should keep abreast of what's happening in its backyard, but I digress.

This morning at 7:43 am, I noted the following foreign exchange rates:

USD/JPY=147.8538

USD/GBP=0.7839

USD/EUR=0.9175

USD/CAD=1.3492

USD/XCD=2.70

Over a one-day period, the dollar weakened against the euro, pound, loonie (Canadian dollar), and the yen. The Eastern Caribbean dollar has been pegged at 2.70 per U.S. dollar since 1979, so no surprises there.

In my opinion, the biggest risk to the U.S. dollar is lowered demand for the currency. With all the chit chat about BRICS, de-dollarization, and de-globalization, I am looking for narrative that incentivizes support for the currency. I cannot say that Mr Powell's testimony was a sales pitch for the U.S. dollar and my subconscious did not expect one.

Mr Powell did imply that the federal funds rate would stay at its current level through the spring. The overnight rate at which banks exchange their excess reserves has been in the 5.25% to 5.50% range since July 2023. Banks tend to change their lending rates along the direction of change in the target federal funds rate, so maintaining the overnight rate through the spring may mean that borrowers in need of some credit relief will not get that relief for a little while longer.

On how soon the overnight rate may change, Mr Powell said the following:

"We believe that our policy rate is likely at its peak for this tightening cycle. If the economy evolves broadly as expected, it will likely be appropriate to begin dialing back policy restraint at some point this year. But the economic outlook is uncertain, and ongoing progress toward our 2 percent inflation objective is not assured. Reducing policy restraint too soon or too much could result in a reversal of progress we have seen in inflation and ultimately require even tighter policy to get inflation back to 2 percent. At the same time, reducing policy restraint too late or too little could unduly weaken economic activity and employment. In considering any adjustments to the target range for the policy rate, we will carefully assess the incoming data, the evolving outlook, and the balance of risks."

Mr. Powell and other members of the Federal Open Market Committee have been making it clear that they need to see better data on a consistent basis before deciding to change the overnight rate. The weakening of the dollar in terms of the other currencies adds to the argument that there is an expectation that the Federal Reserve's overnight rate will fall within the year. Exactly when, I sure do not know.

Mr Powell will deliver the same testimony today to the U.S. Senate Committee on Banking, Housing and Urban Affairs beginning at 9:40 am.