Dollar rally looks fragile despite hawkish FOMC minutes

The U.S. dollar is attempting to extend gains this morning after receiving a modest boost from the latest Federal Reserve minutes. However, beneath the surface, the broader tone suggests the rally may struggle to gain lasting traction.

Dollar gets a lift — But for how long?

The greenback found support after the release of the Federal Open Market Committee (FOMC) minutes. Market participants initially focused on language suggesting that several policymakers would prefer a more “two-sided” description of the Fed’s policy outlook — signaling that rate hikes remain possible if inflation stays above target.

That headline grabbed attention. But the deeper message of the minutes paints a more balanced picture:

• Downside risks to employment have eased
• Economic activity remains relatively strong
• Inflation is expected to soften later this year
• Further rate cuts could still be appropriate in 2025

In short, while the Fed is keeping optionality alive, it is not signaling an imminent shift back toward tightening. The emphasis now appears to be shifting away from labor market concerns and back toward inflation data.

For the dollar to sustain a meaningful rally, inflation would need to re-accelerate. Current market pricing still reflects expectations for two Fed rate cuts this year — and unless inflation surprises to the upside, that outlook is unlikely to change materially.

Rare USD/JPY rate check signals policy coordination

One of the more notable revelations in the minutes was confirmation that the New York Fed conducted a rate check in USD/JPY on behalf of the U.S. Treasury.

The check reportedly occurred around 5:00pm London time on Friday, January 23, when USD/JPY was trading near 157. Rate checks of this nature are extremely rare in developed FX markets and are often interpreted as a warning shot to speculators.

The move appears designed to prevent USD/JPY from sustaining a break above 160 — a level that has become politically and economically sensitive. The signal suggests:

• Washington is prepared to take a more active stance in FX markets
• Tokyo and Washington are aligned in preventing excessive yen weakness
• There is growing discomfort with rapid dollar appreciation against the yen

With monetary policy dynamics also shifting — the Fed moving toward easing and the Bank of Japan gradually tightening — the macro backdrop favors a more stable or even softer USD/JPY profile.

Asset managers are likely to view rallies into the 156–158 zone as opportunities to sell, especially given the apparent policy coordination.

DXY outlook

The U.S. Dollar Index (DXY) could drift toward the 96.50 area in the near term. But sentiment appears skewed toward fading strength rather than building long positions.

If incoming inflation data validates expectations for two rate cuts, downside risks for the dollar could re-emerge — potentially pressuring DXY below key support levels.