Dollar Falls on Interest Rate Differential Outlook

Group 1: Dollar Index and Economic Outlook - The dollar index (DXY00) is down -0.30%, retreating from a one-week high, indicating underlying weakness in the dollar as the FOMC is expected to cut interest rates by about -50 bp in 2026 [1] - The Fed is increasing liquidity in the financial system by purchasing $40 billion a month in T-bills, contributing to the dollar's pressure [2] - Markets are pricing in a 20% chance of a -25 bp cut in the fed funds target range at the upcoming FOMC meeting on January 27-28 [3] Group 2: Euro and ECB Position - EUR/USD is up +0.48% due to dollar weakness, supported by ECB officials' comments expressing satisfaction with the current outlook for interest rates [4] - ECB Governing Council member Gediminas Simkus stated satisfaction with current interest rates, citing inflation levels close to the 2% target and improved, albeit sluggish, economic growth [5] - The ECB is not expected to cut rates at the next policy meeting on February 5, with swaps pricing in a 0% chance of a -25 bp cut [6] Group 3: Yen and Bank of Japan - USD/JPY is down -0.47%, with the yen supported by a recent +25 bp rate hike by the Bank of Japan and rising interest rate differentials [6]