New York (Business Emerge), September 5: As the U.S. Federal Reserve prepares to lower interest rates, the once-mighty U.S. dollar is losing ground rapidly, with the currency having fallen 5% from its peak earlier this year. The drop has brought the dollar to nearly a one-year low against other major global currencies, a significant decline driven by a sharp fall last month.
The primary reason behind this downward trend is the anticipated reduction in U.S. interest rates. For years, the dollar benefited from a strong U.S. economy and persistent inflation, which kept interest rates well above those in other developed nations. This yield advantage made dollar-based assets highly attractive, helping the currency reach a two-decade high in 2022.
The dynamic is now shifting. With inflation cooling and Federal Reserve Chairman Jerome Powell signaling that the time has come to begin cutting rates, investors are preparing for a shift in the market. Powell’s remarks at the central bank’s upcoming September monetary policy meeting are expected to confirm this move, starting a process of rate reductions that could redefine the dollar’s trajectory. “We’ve consistently believed that once the Fed begins to cut rates, the dollar would start to weaken, and we still hold that view,” said Brian Rose, senior U.S. economist at UBS Global Wealth Management.
This shift in monetary policy holds significant importance for global markets. A weakening dollar can provide U.S. exporters with a competitive edge abroad, as their products become cheaper. Additionally, multinational corporations may benefit from lower costs when converting foreign earnings back into U.S. currency.
The extent of the dollar’s future decline will likely depend on the depth of the Fed’s rate cuts and how quickly other central banks around the world adjust their policies. While the U.S. economy still maintains a stronger position than many of its global counterparts, the gap is narrowing. The yield difference between U.S. 10-year Treasury bonds and equivalent German bunds has recently contracted but still remains close to its five-year average.
Meanwhile, market bets are heavily skewed toward a significant reduction in U.S. rates. Futures tied to the Fed’s policy rate show traders predicting cuts of around 100 basis points by the end of this year, compared to approximately 60 basis points for the European Central Bank.