Here’s an overview of how major currencies have moved against the US dollar since the start of the month, what happened after last week’s Fed decision, and what other major central banks did during the month.
With the exception of the yen, the dollar weakened significantly against the rest of the major currencies after the Fed decision. In particular, currencies with higher betas benefited from this decline. Positive risk sentiment also helps this trend, but in the case of the Australian dollar and the British pound, the Reserve Bank of Australia and the Bank of England continue to maintain a more dovish policy stance.
What the Fed has shown this month is that markets can urge it to act quickly. So the key variable that will determine the pace of rate cuts now will be how economic developments play out.
The response this week suggests that market players are comfortable with a soft landing scenario. But if US data points to a soft landing scenario,He is In a downturn, I think they may become more insistent in an attempt to push Powell and company to exercise the Fed’s sell option faster.
As it stands, Fed funds futures are pricing in a 59% chance of a 50 basis point rate cut in November already.
The drop in the yield on the two-year US Treasury note to 3.52%, its lowest level in two years, is not helping the dollar sentiment at the moment, even as the yield on the 10-year US Treasury note remains stable at 3.74%.
I am sympathetic to the argument that the Fed will probably cut rates faster than anyone else and reach the final rate much faster. When the dust settles, the federal funds rate of around 3% or more will still be very attractive compared to the rest of the big banks.
Conversely, central banks that are cutting rates at a slower pace will have to catch up by cutting rates at a faster pace in the future. This is another point where we can argue that the dollar could return to its former glory.
But for now, the market’s focus is still largely on How fast will the Fed cut interest rates? Not on Where prices may end at the end of the cycle. But until this focus changes, the dollar may find itself in a weaker position over the period.