The dollar rose against a basket of currencies, rebounding from a four-year low touched in the prior session, after Treasury Secretary Scott Bessent reaffirmed the United States' preference for a strong dollar.
The United States has a strong dollar policy and that means setting the right fundamentals, Bessent said on Wednesday, while denying that the U.S. was intervening in currency markets to support the Japanese yen.
The dollar index, which measures the US currency's strength against a basket of peers, rose 0.5% to 96.391. The index sank as low as 95.86 on Tuesday, its weakest since February 2022, after US President Donald Trump brushed off this month's slide, emboldening dollar bears.
The dollar index is down nearly 2% for the year, after falling 9.4% last year.
Trump said on Tuesday the value of the dollar was "great", when asked if he thought it had declined too much. Traders took this as a signal to intensify dollar selling, ahead of a Federal Reserve policy decision later on Wednesday.
"The retracement/rebound in the USD is pretty logical, really, given that Bessent pushed back about as hard as you can imagine on the idea that the Trump Administration are seeking to engineer a softer USD, as well as putting to bed the market chatter that the Treasury were also seeking to prop up the yen," said Michael Brown, market analyst at online broker Pepperstone in London.
"I suppose this puts US back to the 'status quo' really, which it must be said is still the 'sell America' trade, as participants trim US exposures amid continued policy volatility on the trade front," Brown said.
The dollar has been under pressure due to several factors: expectations of continued Federal Reserve rate cuts, tariff uncertainty, policy volatility including threats to Fed independence and rising fiscal deficits, all of which have eroded investor confidence in US economic stability.
"The dollar's latest move reflects a broader reassessment of the US and global macro outlook. At the same time, several major currency pairs have broken key multi-year technical levels, which has accelerated flows and reinforced the trend," Joel Kruger, market strategist at LMAX Group, said.
On Tuesday, the euro topped $1.2 for the first time since 2021, the pound hit 4-1/2-year highs, while the yen is set for its strongest monthly performance against the dollar since April, supported by speculation of joint Japanese-U.S. official intervention to support the Japanese currency.
ECB officials voice concern
The dollar weakness may offer some respite to Japanese officials, but is already a source of concern for others.
Two European Central Bank officials said today the strength of the euro could influence monetary policy.
Austrian central bank governor Martin Kocher told the Financial Times the ECB may have to consider another interest-rate cut if the strength of the euro starts to affect the outlook for inflation.
Bank of France Governor François Villeroy de Galhau said in a LinkedIn post that policymakers were "closely monitoring the appreciation of the euro and its potential impact on lower inflation".
The euro fell by as much as 0.63% to a session low of $1.19623. It was last down 0.5% on the day at $1.19715 this afternoon, but still set for a 2% gain this month.
"The US would like a stronger yen. The Japanese certainly don't want an ever-weakening yen. So until it's gone a significant distance, everybody's on the same side. The euro is, in really effective terms, very strong at the moment and the economy's not got any inflation to worry about, really," Societe Generale head of FX strategy Kit Juckes said.
"The odd man out is the dollar, in the sense that there's some stubbornness with US inflation, the economy is in very good shape. The asset markets are doing great," he added.
The weakness in the dollar, which tumbled more than 9% in 2025 and has dropped nearly 2.5% in January, has been largely a function of investor concern over Trump's erratic approach to trade and international diplomacy, fears over Fed independence and huge increases in public spending.
The US economy, meanwhile, is estimated to have grown by 5.4% in the fourth quarter of 2025, based on the Atlanta Fed's GDPNow indicator, above the third quarter's two-year high of 4.4%.
Reprieve for yen
The Japanese yen has been a major beneficiary of the drop in the dollar, surging over 1% to a three-month high of 152.10 per US dollar yesterday.
It had softened a touch today, leaving the dollar up 0.2% at 152.43.
Investors remain unconvinced about the impact of an actual intervention, especially because Prime Minister Sanae Takaichi is basing her snap election campaign on expanded stimulus measures. Japan's election is set for February 8.
