Dollar limping, but set to fightback as Fed rate cuts now priced in: Macquarie By Investing.com

Investing.com – The U.S. dollar has found its footing after a few weeks of struggle, but as bears sharpen their claws for another strike, some are pointing to favorable fundamentals including pricing in interest rate cuts that will provide the greenback with plenty of resistance.

The dollar has “clearly suffered since the beginning of July,” Macquarie said, as traders shifted their expectations toward Fed rate cuts starting in the third quarter rather than the fourth, but “we doubt that dollar weakness will persist broadly through the end of 2024.”

While expectations of three Fed rate cuts — in September, November and December — have been the bulk of the pressure, the rate cuts “are now fully priced into US Treasury yields,” suggesting limited pain for the dollar, Macquarie adds.

The US dollar is also likely to benefit from the fall of its foreign exchange rivals, including the euro, at a time when the euro zone has seen much weaker inflation and growth, which will force the European Central Bank to resume interest rate cuts in September, keeping the euro in check.

“The ECB is likely to ease at least as much as the Fed did in 2024 by the end of the year, and continue to do so through 2025, allowing for convergence to 1.05 by mid-2025,” Macquarie said.

Meanwhile, fundamentals also bode well for the dollar, with the coming weeks expected to show that inflation expectations will reach their limits by late 2024, dampening expectations that the Fed will adopt an aggressive easing cycle.

Macquarie believes the political front could also prove to be a source of strength for the dollar, as markets may soon begin to realize that “Trump’s policy agenda will be inflationary, not deflationary.”

In the wake of the attempted assassination of Trump, and the ongoing internal struggles among Democrats, “the political backdrop has changed enough in the past two weeks … to make reasonable predictions of a Trump victory in November,” Macquarie said.

As the November election approaches, Macquarie expects traders to increasingly focus on the implications of Trump’s policies including immigration restrictions, tariffs, deglobalization and more expansionary U.S. fiscal policy that is likely to support inflation.

“These are all things that could help the US dollar reassert its fundamental strength,” Macquarie added.