The dollar gives back its gains and gold rebounds after two Fed officials play down an October move

The dollar retreated from its 18-month high despite strong inflation data, Reuters reported¹. CNBC reported the currency pulling back as Treasury yields fell and bets on a Fed rate rise eased², and the dollar index fell on Thursday⁷. Gold rebounded on the weaker dollar and lower yields, with October rate-hike expectations subdued³.

The move followed two Fed officials. Mary Daly, president of the San Francisco Fed, said rate rises were likely needed but not urgently, in an interview with Reuters⁴. Michelle Bowman, the Fed’s vice chair for supervision, said inflation was above target but there was no urgency to act, and that there was room to assess economic developments before taking further policy action⁵. Both were reported as saying the central bank could wait for more evidence^2,7.

Why it matters to investors

This is a market trading the reaction function rather than the data. The inflation readings were strong¹, and the currency still fell, because what moved was the expected path of policy. The US ten-year Treasury yield dropped to a three-week low⁸, and the Wall Street Journal reported Treasury and eurozone yields falling as risk aversion beat inflation fears⁶.

That marks a turn from last week, when a steep bond selloff had sent yields to their highest level in 24 years⁶. Not every voice points the same way: the New York Fed’s John Williams reiterated that one more rate rise may be appropriate⁸, so the division inside the committee is about timing rather than direction.

Gold’s rebound is the mirror image of the same trade³. A softer dollar and lower nominal yields relieve the two pressures that had been working against the metal.

The split in the data also tells investors where to look. Trading Economics attributed the dollar index’s fall on Thursday to the comments from Bowman and Daly⁷, while its report on the ten-year yield’s three-week low cited the New York Fed’s John Williams reiterating that one more rate rise may be appropriate⁸. That makes the next round of Fed speeches, rather than the next price release, the event that matters most for both markets.

What to watch

Investors will watch remarks from Fed officials including the chair, Kevin Warsh, at the International Monetary Fund and World Bank annual meetings in Bangkok on Friday for clues on the path of policy¹.

The test of this week’s repricing is whether yields hold their lower range once the risk aversion that drove them fades⁶, and whether the committee’s next speakers lean towards Daly and Bowman’s patience^4,5 or towards Williams⁸.

One caution: the inflation data that the market looked past has not changed. Bowman herself described inflation as above the Fed’s goal while arguing there was room to wait⁵, and Reuters framed the dollar’s retreat as happening despite strong data rather than because the data had softened¹.