The likely start of the Federal Reserve's long-anticipated rate-cutting cycle in September has sent the US dollar to the lowest level against its G10 currency peers in more than a year. Foreign exchange strategists believe the greenback will fall further before it hits bottom.
The US Dollar Index, a measure of the dollar against a basket of other widely traded international currencies, has fallen about 5% over the past two months as the Fed's preferred inflation measure fell within striking distance of the central bank's target. The dollar had been on a historic bull run as the Fed began an aggressive rate hiking cycle in March 2022 to tame inflation, which had surged to the highest levels since the early 1980s.
While interest rates remain at more than 20-year highs, Fed Chairman Jerome Powell used his annual Jackson Hole, Wyo., speech last week to strongly signal that rate cuts would begin at the central bank's September meeting as the Fed was poised to shift its focus from price stability to anchoring policy on jobs data. With the majority of the futures market now expecting the Fed to cut its benchmark federal funds rate by 100 basis points or more before the end of the year, global interest rate differentials look poised for further dollar weakness.
"The dollar will remain under broad, downside pressure until we get top-line data that confirms the US labor market is adjusting smoothly," said Elias Haddad, a senior markets strategist with Brown Brothers Harriman.
The latest government data on the state of the US labor market will be released next week and stronger-than-expected job growth could boost the dollar in the near term, Haddad said. Still, a continued rise in unemployment and a further decline in job creation could push the dollar down further, perhaps another 10% lower if a quickly deteriorating labor market pushes the Fed to cut even more aggressively than expected, Haddad said.
A surprising spike in joblessness could lead to a further decline in the dollar, though there could be a floor to just how much further it will fall, said Matthew Weller, global head of market research with FOREX.com and City Index.
"It's hard to imagine more than the currently discounted 100 basis points-plus of easing expected by traders this year, but if the jobs market drops off sharply, we could see multiple 50 basis points rate cuts," Weller said. "In that scenario, the US dollar may fall initially, but at some point, it could catch a safe-haven bid on concerns about the global economy."
The dollar is seen as a safe-haven currency, one that is widely expected to keep or boost value during stretches of turbulence in the market.
In addition, if inflation moderates, or rises further, and the jobs market remains stubbornly robust, it is possible that the dollar could see a relatively substantial rally before the end of 2024.
"The market has still priced in too many rate cuts between now and the end of the year," said Jane Foley, head of foreign exchange strategy at Rabobank. "That suggests that the dollar could benefit from some pullbacks in the approach to the [September Fed] meeting if US data releases provide a reassuring picture about the pace and depth of the US economic slowdown."