The greenback gave back part of Monday's gains on Tuesday, falling against all seven major currencies as traders squared positions ahead of Wednesday's U.S. inflation report and digested a notably calmer message from one of the Federal Reserve's most influential voices.
New York Fed President John Williams told Bloomberg News that one more rate hike may be appropriate this year, but that he currently sees no reason to expect further increases in 2027. He said he expects inflation to slow considerably and approach the Fed's 2% target next year, noting there's little sign of broad price pressure outside of AI and energy, and no evidence the labor market is driving inflation. Williams didn't hint at cuts, but for a market bracing for a longer tightening cycle, the idea that the finish line might be close was enough.
Bond markets reacted first. The 10-year Treasury yield fell about 3 basis points to roughly 5.22%, and the 30-year dropped more than 3 basis points to around 5.57%. The 2-year yield actually edged up slightly to about 4.80%, flattening the curve. That pattern suggests investors still expect a hike in the near term but less tightening further out. The U.S. Dollar Index slipped about 0.35% to near 102.2.
In late trading, EUR/USD rose about 0.4% to 1.1196, GBP/USD climbed roughly 0.3% to 1.3251, and AUD/USD gained around 0.3% to 0.6981. The Canadian dollar was the day's standout, with USD/CAD falling nearly 0.5% to 1.4213 as higher oil prices gave the loonie extra support. The yen gained the least, with USD/JPY easing about 0.2% to 158.30. NZD/USD added about 0.45% to 0.5611.
The euro got a small lift during London hours after German inflation picked up to 3.3% year over year from 2.9%, in line with expectations. Still, the bigger picture for the single currency remains shaky, with EUR/USD having recently touched its lowest levels since May 2025.
Not every Fed official sounded as relaxed as Williams. Boston Fed President Susan Collins repeated her support for another hike before the end of 2026 and said she's closely watching whether inflation spreads beyond energy into a wider range of goods and services. She pointed to AI and data-center investment, tariffs, and energy costs linked to the Middle East war as possible sources of stickier inflation. Fed Governor Christopher Waller added that the surge in long-term yields is already cooling demand in housing and autos, even though that isn't the Fed's goal.
All of this puts Wednesday's September CPI report squarely in the spotlight. Gasoline is expected to push the headline number up sharply, so the market reaction is likely to hinge on core inflation. A soft core reading would back Williams' view that price pressures are shock-driven and could keep yields and the dollar under pressure. A hot one would strengthen the Collins camp and raise the odds of action at the Fed's October 27-28 meeting, which could quickly reverse Tuesday's dollar weakness.