The US Dollar Index, which measures the strength of the US dollar against a basket of currencies, is on the verge of erasing all of its gains for the year, as foreign exchange traders bet that the Federal Reserve will cut interest rates faster than previously expected to support the US economy. Despite a slight increase in the Bloomberg Dollar Spot Index on Wednesday, it is still less than one percentage point away from its lowest level since December last year, meaning that it is about to wipe out the full-year gains. The exchange rate of the US dollar against the euro is close to its lowest level in over a year, while the exchange rate of the US dollar against the pound is at its lowest level in at least two and a half years.
The Federal Reserve's decision to initiate an easy monetary policy by significantly cutting interest rates by 50 basis points, and the expectation of a substantial cut of 200 basis points by the end of next year, undoubtedly puts great pressure on the US dollar. The market debate over the magnitude of the near-term interest rate cut, that is, the cut before the end of this year, is also intensifying. On Tuesday, interest rate futures traders increased their bets on further easing policies by the Federal Reserve, with the CME "FedWatch Tool" showing that the possibility of the Federal Reserve announcing another 50 basis point cut in November once exceeded 50%.
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"Since the end of July, as the market has shifted towards the prospect of more aggressive easing policies by the Federal Open Market Committee (FOMC), the US dollar has weakened significantly," said Lee Hardman, a senior foreign exchange analyst at Mitsubishi UFJ Financial Group. "We believe that the US dollar is very likely to weaken further in the future, although the extent of the weakening may be smaller."
Wall Street's bearish stance on the US dollar has been shifting for a long time. Goldman Sachs, a major Wall Street bank that has long been bullish on the US dollar and even before the Federal Reserve's interest rate cut, unexpectedly lowered its exchange rate expectations for the US dollar against the euro, pound, and yen last week. The bank's analysts said that the Federal Reserve's unexpected substantial interest rate cut decision indicates that the Federal Reserve is willing to respond more aggressively to potential economic recessions than other central banks around the world.
The foreign exchange strategy team from JPMorgan said that they will maintain the US dollar exposure "slightly and biased towards net neutrality" until the US labor market data further clarifies the Federal Reserve's easing interest rate path.
Fortunately, there are no clear signs that the US economy is in a recession. Nevertheless, tense signs indicating a slowdown in economic growth continue to emerge, including an increase in the number of unemployed people, a sharp slowdown in non-farm employment, and the gradual depletion of the trend of excess savings, coupled with an increase in delinquency rates. On Tuesday, the latest survey data showed that the US consumer confidence index recorded the largest drop in three years.
Federal Reserve Chairman Jerome Powell said at a press conference after the Federal Reserve announced a 50 basis point interest rate cut that the market should not assume that 50 basis points is the "new pace of interest rate cuts," but emphasized that officials will continue to monitor economic activity to determine future interest rate policy measures. Foreign exchange traders looking for clues to the trend of the US dollar are likely to closely monitor the US economic growth data and inflation data later this week to gain insight into whether the US economy remains resilient.
Contrary to the US Dollar Index, the prices of short-term Treasury bonds have been rising since September, but they all reflect the increased bets of financial institution traders on more aggressive easing policies by the Federal Reserve. The yield on the 2-year US Treasury bond, which is most sensitive to interest rate expectations, continues to decline, indicating that market expectations for interest rate cuts are continuously rising. Currently, the yield on the 2-year US Treasury bond has fallen to its lowest level since the end of 2022 and has further driven the US Treasury yield curve to steepen.
"Weak US dollar" becoming the current trading theme in the foreign exchange market?As more data indicating a slowdown in the U.S. economy emerges, the aggressive interest rate cut expectations currently priced in by the financial markets have put immense pressure on the U.S. dollar exchange rate. The U.S. Dollar Index, which measures the value of the dollar against a basket of major global currencies, experienced its worst month this year in August and continued to weaken in September, showing that the "weak dollar" trend has become a consensus among foreign exchange traders.
Sophia Drossos, a market strategist and economist at Point72 Asset Management, a U.S. asset management giant, recently stated in an interview that as the Federal Reserve is about to begin a new cycle of reducing borrowing costs, and as other parts of the world show signs of economic optimism driven by expectations of rate cuts, the dollar's exchange rate against other sovereign currencies is entering a clear downward trend. Drossos' call aligns with the views of Wall Street strategists on the future weakening trend of the dollar.
The weakening of the U.S. Dollar Index during the Fed's rate cut cycle, and the continuous rise in gold prices denominated in dollars during the rate cut cycle, seem to have become the consensus expectations of most market strategists and economists on Wall Street. The strategy team from Pimco, a top global asset management institution, stated that since the 1990s, during each of the Fed's initial rate cuts, the dollar has often temporarily weakened, and as policy normalization proceeds, the dollar may lose its status as a high-yield currency, facing moderate depreciation pressure.
Goldman Sachs, a Wall Street giant known as the "commodity flag bearer," has repeatedly proclaimed the start of a commodity bull market earlier this year. However, in recent times, Goldman has frequently changed its stance, stating that the "commodity 5D bull market" discussed at the end of May this year is unlikely to materialize, and now Goldman is only bullish on gold, a major global asset class.
The analysis team from UBS, an international bank, has set a gold price target of $2,700 per ounce for the mid-2025 period, while also expecting an acceleration in gold ETF demand in the coming months. Another Wall Street giant, Citigroup, estimates that, driven by the Fed's rate cut cycle, strong ETF demand, and robust physical demand from the over-the-counter market, gold prices could reach $3,000 per ounce by mid-2025 and $2,600 per ounce by the end of 2024.
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