The recent trend of the US dollar is facing multiple pressures. The market generally expects the Federal Reserve to take a more aggressive pace of interest rate cuts in response to signs of economic weakness, causing the US dollar to gradually give up its gains since the beginning of this year. Although the US dollar spot index rose slightly on Wednesday (September 25th), it is only one percentage point away from its lowest point since December last year, and the market atmosphere still leans towards caution.
The Federal Reserve's expectation of interest rate cuts has become the focus
The core driving force behind this round of market volatility comes from the Federal Reserve's policy expectations. The market widely expects the Federal Reserve to initiate loose policies, especially the decision to cut interest rates by half a percentage point announced last week. This measure marks a clear shift in policy and puts pressure on the US dollar. In the foreign exchange market, the US dollar is close to a one-year low against the euro, while it has hit its lowest level against the pound in two and a half years.
Renowned forex analyst Lee Hardman pointed out that since the end of July, the US dollar has shown significant weakness as the market expects the Federal Reserve to adopt more aggressive easing policies. He added, "Further weakening of the US dollar is possible, but at present, the magnitude will be relatively moderate
This viewpoint has been widely recognized by the market, especially against the backdrop of a gradually weakening economic outlook in the United States. The consumer confidence index released on Tuesday saw its largest decline in three years, further confirming concerns about an economic downturn. Although there is currently no direct evidence to suggest that the US economy has fallen into recession, signs of increased unemployment, decreased savings, and rising default rates all indicate signs of weakness.
Strategic adjustments by major institutions
Faced with the Federal Reserve's more aggressive easing pace, major institutions in the market have adjusted their expectations for the US dollar. Goldman Sachs Group lowered its exchange rate forecast for the US dollar against major currencies such as the euro, pound, and yen last week, indicating that the market is beginning to lean towards a weaker US dollar. Goldman Sachs believes that the Federal Reserve's actions indicate that its response to economic downturns will exceed that of other central banks, which will reduce the competitiveness of the US dollar in the global currency market.
At the same time, JPMorgan strategists have maintained a more neutral attitude, stating that they will maintain a "slight and net neutral" exposure to the US dollar until the Fed's interest rate path becomes clearer. This means that they will not further increase their bets on the US dollar for the time being, but will adopt a wait-and-see attitude.
From the actual market trading situation, the US dollar has shown signs of weakness. Although the probability of the Federal Reserve cutting interest rates in the short term is high, some traders are beginning to bet on the possibility of another rate cut in November. At present, the market estimates the probability of another 50 basis point interest rate cut in November to be about 50%. Federal Reserve Chairman Powell also made it clear in his recent speech that the market should not assume that 50 basis points will be a "new step" in interest rate cuts, and that the future policy path will be dynamically adjusted based on economic data.
The linkage effect of the bond market
Another key factor contributing to the weakening of the US dollar comes from the reaction of the bond market. As traders bet that the Federal Reserve will further relax its policy, the yield of short-term US treasury bond bonds began to rise, especially the yield of two-year treasury bond fell to the lowest point since the end of 2022. This trend has further steepened the US bond curve, showing the market's shift in expectations of future inflation and economic growth.
Analysts have pointed out that changes in bond yields directly affect the trend of the US dollar, especially in short-term and medium-term trading strategies. For professional traders, this weak trend in the US dollar provides an opportunity for other currencies to rebound, especially major currencies such as the euro and yen.
Future policy choices of the Federal Reserve
Looking ahead, the trend of the US dollar still depends on the Federal Reserve's next policy choices. With the release of labor market data in the United States, traders will closely monitor the guiding role of these data on the Federal Reserve's policy path. In the short term, the US dollar may continue to be driven by interest rate policies and economic data.
Although some market participants are concerned that the Federal Reserve's overly aggressive pace of interest rate cuts may lead to economic overheating or exacerbate financial market volatility, based on current economic data, the trend of the US dollar seems to have been included in the track of policy easing.
Overall, the US dollar may still face more volatility in the short term, especially as the policy path of the Federal Reserve is not yet fully clear. Traders need to closely monitor the economic data and speeches of Federal Reserve officials in the coming weeks in order to better respond to market changes.
The current weakness of the US dollar reflects the uncertainty of the Federal Reserve's policies in the market and the complexity of the global economic situation. Although the market expects the Federal Reserve to adopt a more loose monetary policy, the future path still depends on the performance of US economic data. As a trader, it is necessary to flexibly adjust position strategies while paying attention to the direction of Federal Reserve policies, in order to avoid falling into a single market expectation.