The US dollar’s (DXY) recent decline is accelerating, with the currency falling 5% from its 2024 highs, nearing its lowest level in a year against a basket of its peers. This drop follows increasing expectations that the Federal Reserve will soon begin cutting interest rates, ending the dollar’s years-long dominance.
For years, a strong US economy and persistent inflation supported high interest rates, keeping the dollar elevated. However, with inflation cooling and Fed Chairman Jerome Powell signalling that “the time has come” to cut rates, the yield advantage the dollar enjoyed over other currencies is set to fade. The rate cuts are widely expected to begin at the Fed’s upcoming policy meeting on Sept. 17-18.
Investors are now pricing in about 100 basis points of rate cuts by the Fed for this year, which compares to only 60 basis points expected from the European Central Bank. The yield gap between 10-year US Treasuries and German bunds, which has averaged 167 basis points, has narrowed slightly but remains significant. A weaker dollar could benefit US exporters by making their products more competitive and lower the costs for US multinationals when converting foreign earnings into dollars.
Hedge funds and speculative investors have responded to these shifts, moving to a net short position of $8.83 billion on the dollar for the first time in six months, according to data from the Commodity Futures Trading Commission. This represents a sharp reversal from the net long position of $32.6 billion held in May.
The dollar’s path may depend on how aggressively the Fed cuts rates and how quickly other central banks follow suit. The upcoming August jobs report, due on Sept. 6, could offer more insight into any further softening in what has so far been considered a resilient labor market.
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