Dollar climbs 1% against euro before Warsh's debut Fed meeting

The euro slumped more than 1% to a daily low of 1.1483 on Wednesday, extending its decline as traders braced for the Federal Reserve's first policy decision under Chair Kevin Warsh, with the dollar drawing support from expectations of a hawkish hold.

"The market is pricing in a higher probability of a hawkish hold from Warsh's debut, which is driving a pre-emptive dollar bid across the board," said Athanasios Vamvakidis, global head of G-10 FX strategy at Bank of America. "The risk is that any dovish surprise triggers a sharp reversal, but the data trajectory doesn't support that outcome."

The US Dollar Index slipped to around 99.50, while Brent crude held below $80 a barrel as optimism over an interim US-Iran peace deal improved global risk appetite. The euro traded at $1.1611 before the selloff accelerated, while sterling held at $1.3430. Asian currencies showed mixed performance, with the Philippine peso gaining 0.257% and the Japanese yen edging higher after the Bank of Japan's widely expected rate hike, while the South Korean won fell 0.313%. The Thai baht and Malaysian ringgit remained largely stable with minor fluctuations. Currency markets broadly remained range-bound as traders avoided committing to large directional positions less than 48 hours before the Fed's decision.

The move highlights the stakes for Warsh's first meeting, where markets will scrutinize the dot plot — individual rate projections from 19 Fed officials — and forward guidance for any shift in the rate path. Overnight index swaps price a roughly 60% probability that the Fed holds rates steady, with any hawkish surprise potentially pushing EUR/USD toward the 1.14 handle. A dovish hold, by contrast, could trigger a short-covering rally back above 1.16.

Dollar Strength Reverberates Across Emerging Markets

The dollar's advance against the euro rippled through emerging-market currencies, with the Indian rupee opening 11 paise stronger at 94.45 per dollar, supported by the decline in Brent crude below $80. Finrex advised exporters to use any intraday rise in USD/INR to hedge positions, while recommending importers accumulate dollars on dips toward 94.20. The broader Asian currency complex remained subdued as investors avoided large positions ahead of the Fed's decision, with total trading volumes across the region running roughly 15% below the 20-day average.

The last time the Fed transitioned to a new chair — Jerome Powell in February 2018 — the dollar weakened 2.5% in the following month as markets priced in a slower tightening path. A similar outcome this time would require Warsh to strike a more dovish tone than expected, a scenario that appears unlikely given recent inflation data. The divergence between the Fed's expected path and the ECB's trajectory remains the key driver for EUR/USD, with the euro zone facing weaker growth momentum that has kept the European Central Bank on a more cautious footing.

For the euro, the 1.1450 level represents the next key support, a threshold last tested in April. A break below that would open the door toward the 2026 low near 1.14, a move that would require a clear hawkish surprise from Warsh's statement or a deterioration in euro zone economic data. The ECB's next policy meeting is scheduled for July 23, giving traders a month to assess how the Fed's stance influences the global rate outlook.

The broader implications extend beyond currency markets. A sustained dollar rally would pressure commodity prices, particularly gold and industrial metals, while weighing on emerging-market equities that benefit from a weaker dollar environment. The MSCI Emerging Markets Currency Index has already declined 1.8% this quarter as the dollar regained strength, and further gains could accelerate outflows from EM debt funds. Traders will watch for any shift in the Fed's assessment of global risks, which could signal whether Warsh intends to maintain continuity with the previous administration's policy approach or chart a new course. The two-day meeting concludes Wednesday with a statement and press conference scheduled for 2:00 p.m. Washington time.

This article is for informational purposes only and does not constitute investment advice.