U.S. dollar falls amid Fed rate cut bets

Dollar Falls
Dollar Falls

The U.S. dollar fell to a more than one-year low on Friday as investors bet on an aggressive Federal Reserve interest rate cut next week. The prospect of steeper cuts boosted stocks and drove gold prices to record highs. Traders are now pricing in a 43% chance of a 50 basis point cut at the Fed’s September meeting.

This is up from a 30% chance a week ago. The dollar index, which measures the greenback against a basket of six major currencies, fell 0.5% to 95.17. This is its lowest level since July 2023.

The euro rose 0.6% to $1.1120, its highest since August 2023. The Japanese yen strengthened 0.7% to 139.87 per dollar, its strongest since December 2023.

The market is pricing in a more aggressive Fed rate cut,” said Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington.

That’s weighing on the dollar and supporting risk appetite.”

The Fed is widely expected to cut rates by at least 25 basis points at its meeting on September 17-18. But some investors are betting on a larger 50 basis point cut to combat slowing economic growth and trade tensions. Gold prices surged to a record high of $1,546.10 per ounce on Friday.

This was driven by safe-haven demand amid concerns about the global economy and expectations of lower interest rates. U.S. Treasury yields also fell, with the benchmark 10-year yield hitting a three-year low of 1.429%. Lower yields make gold more attractive as an alternative investment.

Dollar weakens ahead of Fed decision

Stocks rallied on the prospect of lower interest rates. The S&P 500 index hit a record high, while the Dow Jones Industrial Average and the Nasdaq Composite also gained.

“The market is expecting a very dovish Fed next week,” said Peter Cardillo, chief market economist at Spartan Capital Securities in New York. That’s giving a boost to stocks and putting pressure on the dollar.”

The U.S. central bank cut rates by 25 basis points in July, its first rate cut in more than a decade. Fed Chair Jerome Powell said the move was a “mid-cycle adjustment” and not the start of a lengthy easing cycle.

But trade tensions between the United States and China have escalated since then, raising concerns about the impact on global growth. U.S. manufacturing activity contracted for the first time in three years in August, while job growth has slowed. “The Fed is going to have to be more aggressive,” said Manimbo.

“The economy is slowing and trade tensions are not going away.”

The European Central Bank cut rates and restarted bond purchases this week, putting pressure on the Fed to follow suit. The ECB’s move also weakened the euro, making U.S. exports less competitive. “The ECB’s bazooka is putting pressure on the Fed to act,” said Cardillo.

“The Fed doesn’t want to be seen as falling behind the curve.”

Investors will be closely watching the Fed’s policy statement and Powell’s press conference on Wednesday for clues on the future path of interest rates. They will also be looking for any signs that the Fed is considering more unconventional policy tools, such as yield curve control or negative interest rates. “The Fed is running out of ammunition,” said Manimbo.

“They may have to get creative if the economy continues to weaken.”

Maya Johnson

Maya is the editor-in-chief of KillerStartups.com. She provides value to early-stage entrepreneurs through content and her weekly newsletter. Reach her at maya@killerstartups.com

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