The DXY Index depreciated by 4.5% this quarter, closing last Friday at 101.11, below the 101.33 mark at the end of 2023. A knee-jerk rebound is possible if the Fed delivers a 25 bps cut (our call) at the FOMC meeting on September 18 instead of the 50 bps reduction priced in by the futures market. However, looking ahead into late 2024 and 2025, we anticipate a further decline in the DXY, potentially falling below its 101-107 range since December 2022.
Unlike the earlier part of 2024, the Fed is not pushing back the market’s aggressive rate cut bets with a “higher for longer” rate stance on sticky US inflation. In the third quarter, the Fed has grown more confident that inflation will continue its downward trend. As a result, the Fed has been paving the ground to start a rate-cutting cycle at this Wednesday’s FOMC meeting to avert a further cooling in the US labour market, an intention likely reflected in the Summary of Economic Projections.
Beyond the Fed’s rate outlook, the greenback also lost momentum with the “Trump Trade”. Vice President Kamala Harris’ performance in last week’s presidential debate cast doubt on a guaranteed victory for former President Donald Trump at the US Presidential elections on November 5, which remains too close to call. Regardless of the election outcome, the next presidential term will face two distinct challenges. First, the next term will begin during a Fed rate-cutting cycle, not a hiking cycle. Second, the massive federal debt accumulated during the last two presidential terms will limit the ability to stimulate the US economy. We forecast US GDP growth slowing to 1.7% in 2025 from 2.3% in 2024.
Other central banks have taken notice of potential USD weakness stemming from the Fed’s rate cut guidance. For example, over the weekend, Bank of Canada Governor Tiff Macklem opened the door to lower rates by 50 bps, citing a weaker labour market and lower oil prices. Despite the recovery in USD/CAD from 1.3440 over the past fortnight, a depreciation bias remains below 1.36.
Meanwhile, appreciation biases in EUR/USD and GBP/USD are intact above their respective support levels of 1.10 and 1.30. The European Central Bank, having lowered its deposit facility rate by 25 bps to 3.50% last Thursday, is unlikely to signal another cut at its next meeting on October 17. Similarly, the Bank of England is expected to hold the bank rate steady at its September 19 meeting after its 25 bps cut to 5% on August 1.
With USD/CHF and EUR/CHF returning this year’s gains, the Swiss National Bank has been reinforcing its dovish stance, with a rate cut expected at its September 26 meeting. The SNB has expressed concerns about the CHF’s strength influencing its inflation assessment and the challenges it poses to the Swiss industry facing weak demand from Europe.
USD/JPY is looking to test its crucial support level at 140 after ending last week at 140.85, its lowest closing level since July 2023. Barring any hawkish surprises from the Fed, the Bank of Japan will likely maintain its commitment to hike rates again at its meeting on September 20. With US data supporting a soft-landing outlook, a repeat of August’s acute market volatility due to an unwinding of yen carry trades is unlikely.
Quote of the day
”If you lose money for the firm, I’ll be understanding. If you lose reputation, I’ll be ruthless.”
Warren Buffett
September 16 in history
Black Wednesday in 1992. The UK government was forced to withdraw GBP from the first European Exchange Rate Mechanism after failing to keep it above the lower limit for ERM participation. 
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