Fed rate cut cycle points to a weaker dollar

Investing.com – The Federal Reserve has begun its rate-cutting cycle, and Bank of America Securities continues to expect the U.S. dollar to weaken modestly through 2025.

“Although the Fed modestly surprised markets with a 50 bps cut last week, we see core currency dynamics largely unchanged in the G10, continuing to rise,” analysts at Bank of America Securities said in a note from September 26.

The bank sees the US dollar as moderately overvalued, but the Fed’s rate cut cycle would likely help mitigate this overvaluation further over the medium term, including our outlook for EUR/USD growth.

“We expect EUR/USD to build on recent gains, with our unrevised forecast profile for end-2024 at 1.12 and end-2025 at 1.17,” BoA said.

The USD’s slide is more likely to continue, the bank said, as disinflationary trends and a weakening labor market support the Fed on a modestly faster pace of rate cuts.

BoA expects another 50 bps cut at the November meeting and a 25 bps cut in December.

At 10:00 ET (14:00 GMT), EUR/USD traded 0.1% higher at 1.1142, up about 1% year to date.