Dollar Declines Against Major Currencies

On Wednesday, the US dollar fell against most major currencies, with the exception of the yen, following a series of unexpectedly weak US economic data. These reports reinforced market expectations for potential interest rate cuts by the Federal Reserve. Minutes from the Fed's June 11-12 meeting supported this sentiment, revealing a widespread assessment among FOMC participants that the economy is gradually cooling.

Fed Minutes Highlight Economic Concerns

The minutes from the Fed meeting highlighted concerns about the economy's trajectory. May’s CPI reading showed progress toward the Fed’s inflation goal, and several participants expressed readiness to respond to unexpected economic weaknesses. This cautious tone added to the market's anticipation of rate cuts.

Weak Economic Data Fuels Rate Cut Expectations

June's ISM services PMI fell into contraction territory, with shrinking new orders and decelerating growth in prices paid. The employment gauge within the ISM report also showed deeper contraction. Additionally, factory orders fell in May against expectations for a rise, initial jobless claims rose more than forecast, and ADP private sector employment growth decelerated unexpectedly.

Investors Prepare for Key Reports

These data releases came as investors prepared for the US Independence Day holiday on Thursday and the government’s monthly employment report on Friday. The FOMC minutes emphasized concerns that further weakening in demand could lead to a larger increase in unemployment than seen in recent history.

Currency Movements Reflect Market Reactions

In currency markets, EUR/USD reached a three-week high, while USD/JPY climbed to another 38-year peak. GBP/USD advanced to its strongest level since mid-June, and AUD/USD rose to levels not seen since January. These movements reflected the market's reaction to the weak US economic data and increased expectations of Fed rate cuts.

Treasury Yields and Equity Markets Respond

US Treasury yields fell by 3-8 basis points, with the 2s-10s curve flattening by 3 basis points to -34.5 basis points. The S&P 500 gained 0.51%, and along with the Nasdaq, posted a record high close, as the data raised hopes that the Federal Reserve could cut interest rates in September.

Commodity Prices Show Mixed Reactions

WTI crude oil gained 0.75% following a larger-than-expected decline in US crude stocks. However, thin trading ahead of the holiday and concerns about rising global inventories limited significant price rises. Copper rallied 2.47%, marking its fourth straight session of gains, supported by signs of firmer demand in China and buying by computer-driven funds. The weaker dollar and heightened US rate cut expectations also provided support. Gold advanced 1.17% to a near two-week high, benefiting from increased focus on a potential September Fed interest rate cut.

End-of-Day Currency Performance

As trading neared the close, EUR/USD was up 0.34%, USD/JPY was flat, GBP/USD had risen by 0.43%, and AUD/USD was up by 0.58%. The market continues to digest the latest data and Fed signals, with investors closely watching for any developments that could further influence the outlook for monetary policy and economic performance.

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