Analyst: Fed's Rate Cut Will Be The Catalyst For A Weaker Dollar
2min read Today, the global market is on the cusp of a significant moment: the announcement of the Federal Reserve's September interest rate decision.
With the Federal Reserve's September rate cut virtually a done deal and global investors having debated for months over whether it will be a 25 basis point or 50 basis point cut, the Fed is finally set to reveal its ultimate answer to the world.
As the bellwether among global central banks, the Fed's interest rate decisions have far-reaching implications for the global financial markets. Sophia Drossos, a strategist and economist at Point72 Asset Management, believes that this rate cut by the Fed will mark a pivotal moment, signaling the official start of the US dollar's downward trajectory and providing a boost to economies in other parts of the world.
The Fed's Rate Cut Will Initiate A Trend of US Dollar Depreciation
According to the CME FedWatch Tool, the market has largely decided that the Fed will cut rates in September, but there is disagreement on the magnitude of the cut: previously, there was a 65% chance of a 50 basis point cut and a 35% chance of a 25 basis point cut.
Before the Fed officially announces its decision, the expectation of a rate cut has already put pressure on the US dollar: August of this year was the worst-performing month for the US dollar exchange rate this year.
Drossos stated that with the Fed's rate cut, the US dollar will weaken further, benefiting all major global currencies, with the euro and the Brazilian real expected to see the largest gains.
This is the beginning of a new trend of weakening dollar, she said, As the Fed starts to cut and other central banks are cutting in tandem, we'll see a stronger global growth outlook.
Other countries May Not Loosen As Much As Expected
There are also different views on Wall Street. Some analysts believe that even after the Fed's rate cut, the US dollar can remain strong because the weak global economy will force central banks around the world to accelerate the pace of rate cuts to stimulate domestic economic growth.
However, Drossos believes that the monetary policy easing of many countries and regions may be less than expected.
First, she expects the European Central Bank to cut rates at a slower pace than the market expects, which will support the euro exchange rate.
In Brazil, the Central Bank of Brazil is expected to raise interest rates on Wednesday, which will boost the real. Drossos said that after this year's sell-off, the real currently looks very cheap and has a lot of room to rise.
In addition, Japanese central bank officials have been hawkish recently, constantly signaling to the market that they will raise interest rates soon. This has supported the yen exchange rate in the past two months.
As for whether the Fed will cut rates by 25 basis points or more this time, Drossos expects the Fed to choose a smaller rate cut (i.e., 25 basis points). If this is the case, it may trigger an instinctive market reaction, as many investors have already digested the Fed's more significant rate cut in advance.