Fed minutes trimmed year-end rate hike odds to 52% from 57%, lowering yields and the dollar. Oil slump on Iran deal hopes added pressure. Inventories falling 8.7m b/d.
The US dollar retreated on Wednesday after the April FOMC minutes trimmed the probability of a year-end rate hike to 52% from 57%. Lower Treasury yields followed the shift in expectations. The move contradicted the typical pattern where a hawkish Fed push lifts the dollar. Markets instead focused on the central bank's patient stance.
The minutes showed that most officials are ready to raise rates if inflation persistently runs above 2%. An overwhelming majority believe that bringing PCE back to target will take longer than previously assumed. The market read this as a signal that the Fed is in no rush to act, even if the door to a hike remains open.
The simple read is that the Fed sounded less urgent than expected, so the dollar fell and yields dropped. The better market read looks at the mechanism. The probability of a year-end hike slipped by five percentage points. That directly lowered the expected path of the fed funds rate. In turn, short-dated Treasury yields declined, removing a key support for the dollar.
The minutes did not rule out a hike. They explicitly stated that most officials see a rate increase as appropriate if inflation persists. The market priced out some of that risk. The committee stressed that inflation will take longer to recede. The net effect is a dovish tilt in the near term.
Key numbers from the minutes:
As a rule, a Fed pivot toward discussing rate hikes pushes Treasury yields higher and strengthens the dollar. In this case, the pivot was already priced in. The market needed the committee to deliver a more hawkish tilt than expected to justify a further dollar bid. The minutes confirmed a holding pattern. The dollar and yields fell because the real news was the lack of new urgency.
Yields on 2-year and 10-year Treasuries declined on the session. Lower absolute yields reduce the carry advantage of holding dollars, which directly weighs on the currency. This is the standard transmission channel from policy expectations to the spot market.
The drop in Treasury yields was helped along by the largest Brent sell-off in two weeks. Donald Trump stated that the US is in the final stage of negotiations with Iran. The remark triggered a sharp move lower in crude prices. Lower oil reduced inflation expectations and allowed yields to ease further.
The oil fundamental picture is not uniformly bearish. According to Goldman Sachs, global oil inventories are falling by 8.7 million b/d in May – twice as fast as at the start of the Middle East conflict. The blockade of the Strait of Hormuz is accelerating the drawdown. If there is no progress toward a peaceful settlement, Brent will resume its rally.
Oil bull case:
A renewed oil rally would play into the dollar's hands, especially in the event of further geopolitical escalation. The dollar tends to benefit from risk-off flows driven by energy supply shocks. For now, the dollar is weaker on the combination of lower yields and lower oil. That dynamic could reverse quickly.
The dollar's retreat and falling Treasury yields allowed gold to find its footing. A weaker dollar reduces the opportunity cost of holding bullion. Lower yields remove some competition from interest-bearing assets. The term structure still works against gold. Sovereign bond yields in key markets remain at the highest levels since 2008, which erodes interest in the precious metal.
Gold was also weighed down by news that Russia had sold gold. Its reserves fell to 73.9 million ounces – a four-year low. The selling adds to the supply side and reinforces the negative sentiment coming from high real yields. Even with the dollar's retreat, gold may struggle to sustain a rally until the global bond market reprices lower or the geopolitical risk premium re-emerges.
Equities were buoyed by NVIDIA's first-quarter results and the SpaceX IPO filing. The tech sector surge supported risk appetite, which is another factor that can weigh on the dollar if the flow continues. The dollar move on Wednesday was primarily a response to the Fed minutes and the oil market, not equity flows.
On AlphaScala's platform, NVDA carries an Alpha Score of 66/100 with a Moderate label. The stock is at $223.47, up 1.30% today. A sustained equity rally would reinforce the dollar's short-term weakness if it pulls safe-haven demand away from the US currency. The direction of indices this week will depend on whether the Fed's patient stance holds as the macro picture evolves.
The next test for the dollar will come from headlines on two fronts. First, any additional Fed commentary that reinforces or contradicts the minutes could move hike odds. Second, the oil market will dominate the macro narrative if Iran negotiations stall or escalate.
For dollar bears: A continued decline in year-end hike odds below 50% would confirm that the market is pricing out the tightening cycle entirely. Lower oil prices would compound the effect.
For dollar bulls: A rebound in Brent above the pre-Iran headline level would revive inflation expectations and the dollar bid. A geopolitical escalation that pushes the Strait of Hormuz disruption further would likely force a repricing of risk, benefitting the dollar as a safe haven.
The current setup leaves the dollar vulnerable in the near term with a clear pathway back to strength. The rate hike odds slipped to 52%, not below 50%. The market remains divided. The minutes bought the dollar some time. The next catalyst – whether oil or inflation data – will decide whether the slide continues or reverses.
Prepared with AlphaScala research tooling and grounded in primary market data: live prices, fundamentals, SEC filings, hedge-fund holdings, and insider activity. Each story is checked against AlphaScala publishing rules before release. Educational coverage, not personalized advice.