Analysis-Bears call for dollar weakness as Fed rate cuts loom Reuters

By Saqib Iqbal Ahmed

NEW YORK, Sept 5 (Reuters) – The decline in the U.S. dollar is gaining speed as anticipated interest rate cuts by the Federal Reserve threaten to end years of U.S. dollar strength.

The dollar is down 5 percent from 2024 highs, near its lowest level in about a year, against a basket of peers after a sharp decline last month.

The reason is an imminent drop in US interest rates. For years, a robust US economy and persistent inflation have kept rates well above those of other developed countries, making dollar-denominated assets more attractive and keeping them high even after the currency hit a two-decade high in 2022.

That yield advantage is set to decline now that inflation has cooled and Fed Chairman Jerome Powell said last month that “the time has come” to start cutting interest rates, a process expected to begin at the monetary policy meeting of the central bank from September 17-18.

“We’ve always been of the view that almost, regardless of other circumstances, once the Fed starts cutting interest rates, the dollar will lose ground,” said Brian Rose, senior U.S. economist at UBS Global Wealth Management. “We still have that vision.”

Accurately assessing the dollar’s trajectory is important for investors because of the currency’s central role in global finance. A weaker dollar could make American exporters’ products more competitive abroad and lower costs for multinational companies converting foreign profits into greenbacks.

How much the dollar falls in the long run could depend on how deeply the Fed cuts interest rates in the coming months and how quickly other global banks follow suit.

For now, the US economy looks stronger than many of its peers. The spread between 10-year yields and equivalent German bonds – recently around 160 basis points – has narrowed in recent months but remains around the five-year average of 167 basis points.

Investors, however, are betting on big rate cuts in the future. Futures on the Fed’s key policy rate show traders pricing about 100 basis points of cuts this year, compared with about 60 basis points for the European Central Bank.

Commodity Futures Trading Commission data tracking the positioning of hedge funds and other speculative investors showed bets on the dollar fell net to $8.83 billion in the week ended Aug. 27, the first bear position in about six months. That compares with a net long of $32.6 billion in May.

“Powell’s recent dour tone suggests more cuts than originally expected,” said Aaron Hurd, senior portfolio manager, currencies, at State Street (NYSE: ) Global Advisors, which recently cut bullish tactical positions on the dollar.

The U.S. government’s August jobs report, due on Sept. 6, could provide clues about any further deterioration in what many policymakers have called a still-healthy labor market.

Slow Decline?

Several factors could prevent a deeper decline in the dollar, at least in the near term. The sell-off in August, during which it lost 2.2%, led some strategists to conclude that the US currency may have fallen too quickly.

“While the Fed’s long telegraph move in September signals some dollar weakness in the fourth quarter, this recent move we’ve seen is a bit of an overreaction,” said Helen Given, associate director of trading at Monex USA.

Monex USA however sees the euro at $1.13 by June 2025, implying a decline of around 2% against the dollar. UBS’s Rose has a similar target for the currency pair.

Many are waiting for more evidence of a slowdown in the US economy before turning more bearish on the dollar.

“The economy is slowing, but it’s still in a very healthy place,” said Thanos Bardas, co-head of global fixed income investing at Neuberger Berman.

Investors also believe the winner of November’s US presidential election could influence the currency’s fortunes. The latest polls show the front-runners, Republican Donald Trump and Democrat Kamala Harris, in a tight race.

Trump has criticized the currency’s strength, saying it hurts US competitiveness. However, many of his policies, such as tariffs and tax cuts, could strengthen the dollar, Bardas said.

Steven Englander, head of global G10 FX research at Standard Chartered ( OTC: ), wrote late last month that a Harris victory could bring higher taxes and more pressure on the Fed to ease if economic activity slows.

Ultimately, the market’s reaction to the US rate cut is the likely driver of the dollar, said Kit Juckes, FX strategist at Societe Generale (OTC:).

Strong growth has given the U.S. “an insatiable appetite for foreign investment, accompanied by enthusiastic foreign investors looking for yield,” he wrote. “Now that growth is slowing and rates are coming down, we’ll see how that plays out.”