Dollar Sees Marginal Losses Amid Fed’s Interest Rate Cut

Dollar Sees Marginal Losses Amid Fed's Interest Rate Cut

A larger-than-expected rate cut by the Federal Reserve on Wednesday dragged the U.S. dollar and the six-currency Dollar Index lower during the week ended September 20. The U.S. dollar, among other things, declined against the euro, the British pound, the Australian dollar, the Canadian dollar, and the Swedish krona. It however held its ground against the Japanese yen and the Swiss franc.

Though the rate cut euphoria dragged down the Dollar Index more than half a percent by Wednesday, a minor rebound on Friday helped the Index restrict weekly losses to 0.39 percent. During the eventful week, the 6-currency index ranged between a 14-month low of 100.21 recorded on Wednesday and a 6-day high of 101.47 touched on Thursday.

The Fed on Wednesday pleasantly surprised markets by lowering the target range for the federal funds rate by half a percentage point to 4.75 percent to 5 percent. The Federal Open Markets Committee acknowledged that it has gained greater confidence that inflation was moving sustainably toward 2 percent. It also noted that the risks to achieving its employment and inflation goals were roughly in balance.

In the Summary of Economic Projections released simultaneously, the Fed lowered its inflation forecast for 2024 to 2.3 percent from 2.6 percent projected in June. Acknowledging the further progress in inflation, the 2025 projection has also been decreased to 2.1 percent from 2.3 percent projected earlier whereas the 2026 level has been maintained steady at 2 percent.

The Fed’s forecast of growth has been lowered to 2 percent from 2.1 percent in respect of 2024 and maintained at 2 percent in respect of 2025 and 2026.

The Fed forecasts the unemployment rate to rise to 4.4 percent by the end of 2024 and remain at that level through 2025. It is expected to decline to 4.3 percent by 2026 and to 4.2 percent thereafter. In June the Fed had expected unemployment at 4 percent at the end of 2024; at 4.2 percent at the end of 2025; at 4.1 percent at the end of 2026; and 4.2 percent in the longer run.

In light of its latest assessment on inflation, economic growth, and unemployment, the Fed has also published the likely interest rate trajectory.

The projected Federal funds rate at the end of 2024 has been lowered to 4.4 percent from 5.1 percent projected in June, implying another 50 basis points of rate cut in 2024. The median Federal funds rate projection for 2025 is 3.4 percent, lowered from 4.1 percent projected in June implying 100 basis points of rate cuts in 2025. The projection for 2026 has been reduced to 2.9 percent from 3.1 percent made in June portending a half-percent cut in 2026. The Fed’s guidance on future interest rate cuts has impacted the U.S. dollar’s prospects. The terminal rate projection however is at 2.9 percent, a tad higher than the 2.8 percent projected in June, providing support for the dollar.

Price Movements

The dollar’s weakness lifted the EUR/USD pair to a high of 1.1190 on Wednesday. The euro’s rally was however short-lived as the Dollar’s rebound dragged the pair to the week’s low of 1.1068 on Thursday. The pair added 0.78 percent during the week ended September 20, closing at 1.1162 on Friday, versus 1.1076 a week earlier.

The GBP/USD pair jumped 1.52 percent during the week ended September 20, lifting the sterling to $1.3321, from $1.3122 a week earlier. The Bank of England’s widely expected pause on rates that contrasted with the Fed’s larger-than-expected rate cut, the sticky inflation, as well as the strong rebound in retail sales boosted the sterling. During the week, the pair traded between the low of 1.3120 touched on Monday and the more than 2-year high of 1.3342 recorded on Friday.

The Australian Dollar jumped 1.54 percent against the U.S. Dollar during the week ended September 20 in the backdrop of strong employment data and a surge in the Chinese yuan. The pair jumped from the low of 0.6696 recorded on Monday to a high of 0.6841 on Thursday but eventually closed at 0.6806. The pair was at 0.6703 a week earlier.

The yen’s plunge against the greenback was dictated by the Bank of Japan’s cautious status quo on interest rates, not so hawkish comments from BoJ officials as well as a rally in risk assets that followed the Fed’s larger-than-expected rate cut. The USD/JPY pair rallied 2.19 percent during the week ended September 20 as it closed at 143.91 versus 140.82 a week earlier. The pair ranged between the more than 12-month low of 139.57 on Monday and the high of 144.51 on Friday.

After a week of central bank actions that did not fully align with market expectations, the focus of currency markets has now shifted to key economic data as well as Fed comments due during the week.

The Dollar Index has rallied to 100.91 as markets wait for the final update on second-quarter GDP and Fed Chair Powell’s speech on Thursday as well as PCE-based inflation readings on Friday.

The Euro has weakened to $1.1124 whereas the pound has decreased to $1.3314. The USD/ JPY pair is currently at 143.55 versus 143.91 at the close on Friday.

The AUD/USD pair has increased to 0.6830 amidst anxiety ahead of the Reserve Bank of Australia’s interest rate decision due on Tuesday and fears of a hawkish outlook. The RBA is widely expected to hold rates steady even as forecasts point to monthly CPI falling to 3.1 percent in August from 3.5 percent in the previous month.

Currency markets are in the meanwhile bracing for more volatility as asset prices align to the changes in interest rates worldwide.

Final Thoughts

The recent larger-than-expected rate cut by the Federal Reserve has had a significant impact on the U.S. dollar, weakening it against several major currencies. The Fed’s decision to lower the federal funds rate target range by half a percentage point reflects its growing confidence in controlling inflation, while also recognizing economic growth and employment challenges ahead.

This move has put pressure on the Dollar Index, which saw a drop, though it managed to regain some ground by the end of the week. As a result, currencies like the euro, British pound, and Australian dollar strengthened against the dollar, while the yen and Swiss franc remained relatively stable, largely due to their own central banks’ policies.

The market’s response to the Fed’s rate cut reflects shifting expectations about the U.S. economy and its broader impact on global financial markets. While the reduction in inflation forecasts for 2024 and beyond signals progress in combating rising prices, the projections for slower growth and higher unemployment also highlight the ongoing challenges the U.S. faces.

The anticipated future interest rate cuts add another layer of uncertainty, especially as investors assess the long-term effects on the dollar and related currency pairs. Looking ahead, currency markets are likely to remain volatile as central bank actions and upcoming economic data shape the next phase of monetary policy adjustments globally.

Article Source: RTTNews

Leave a Reply

Your email address will not be published. Required fields are marked *