Fed Turns Hawkish, Dollar Rises, Gold Falls

The Federal Reserve released a hawkish stance, strengthening the dollar index and weakening the gold price.

Kevin Warsh, the new Federal Reserve Chairman, emphasized in his first  meeting that the central bank will not tolerate persistently high inflation. His statement interpreted by the market as a hawkish stance. The Fed's post-meeting statement also repeatedly mentioned that the US has failed to meet its inflation target for several years, further reinforcing market expectations of a possible interest rate hike. According to the latest market forecast, the probability of the interest rate hike by the Fed before the end of 2026 has exceeded 80%, a significant surge from 30% one month ago.

The U.S. dollar index continues to strengthen, USD/JPY climbs to 161.60 level, which is the highest level since July 2024. Although the Bank of Japan raised rates by 0.25% to 1.0% last week as expected, the exchange rate of yen hasn’t been boosted. The wide U.S.-Japan interest rate differential and persistently high U.S. Treasury yields make carry trades attractive, Japan’s relatively low-interest rate drives capital flow into dollar-denominated assets.

Amid a stronger dollar and easing Middle East tensions, the gold price has fallen for three consecutive weeks, currently staying around $4,200 per ounce. However, the situation in the Middle East remains high uncertainty. The first round of U.S.-Iran peace talk in Switzerland over the weekend ended after Trump threatens Tehran. If the negotiation collapses and conflict resumes, the global energy supplies would cause significant disruption, and the gold’s safe-haven demand could quickly rebound. Therefore, the possibility of gold gaining momentum still exists.