Dollar Weakness May Pause as Markets Overstate Fed Rate Cuts: Reuters Poll

By Sarupya Ganguly

BENGALURU (Reuters) – A majority of foreign exchange strategists surveyed by Reuters believe that the recent decline of the U.S. dollar will come to a halt in the next three months, despite increased speculation among financial market traders for interest rate cuts by the Federal Reserve.

After experiencing a roughly 5% increase against a basket of major currencies by midyear, the dollar has nearly lost all its gains, as interest rate futures began to factor in about 100 basis points of anticipated Fed easing this year, which is nearly double the expectations from June.

This shift was partly influenced by July’s labor market data, which indicated signs of a slowdown, and was further reinforced by Fed Chair Jerome Powell’s recent comments at Jackson Hole, where he suggested that rate cuts may be forthcoming.

Interest rate futures have fully accounted for a 25 basis point cut from the Fed this month, with around 40% likelihood for an additional 25 basis point reduction, indicating a notable risk of a half-point cut.

"There’s likely to be some volatility in the markets over the next week or two. Payrolls data will ultimately decide whether the Fed opts for a 50 or 25 basis point cut on September 18, which will influence the dollar’s short-term direction," stated Shaun Osborne, chief currency strategist at Scotiabank.

Economists in a separate Reuters poll anticipate that upcoming data will reveal an addition of 160,000 jobs in August, a rebound from July’s 114,000, with the unemployment rate expected to drop slightly to 4.2%.

Forecasts suggest the euro will decline by about 0.5%, dropping from approximately $1.11 to $1.10 by the end of November. It’s then predicted to recover to $1.11 by the end of February and reach $1.12 in a year, indicating limited upward movement for the common currency.

"We would not be too quick to dismiss the dollar’s weakness in August. The dollar is currently positioned at a high value, and the Fed is likely to adjust real rates quicker than other major central banks," said Kamakshya Trivedi, head of global FX, rates, and emerging markets strategy at Goldman Sachs.

"However, we would be cautious about significant further depreciation of the dollar unless there is a change in comparative growth and asset return expectations."

The latest data from the Commodity Futures Trading Commission indicates that speculators have flipped their positions to a net short on the dollar for the first time since February. Among those surveyed, nearly 70%, or 45 of 66 participants, expect the dollar to either maintain its current level or recover, while 21 foresee further weakening.

"Market expectations for 100 basis points of rate cuts between now and year-end are quite aggressive and, at this time, challenging to justify, considering there is still strong momentum behind the U.S. economy," Osborne added.

A separate Reuters survey of economists has maintained a more consistent outlook throughout the year, projecting a 25 basis point cut in each of the three remaining Fed meetings this year.

"We believe the recent dollar weakness is exaggerated. While the economy isn’t robust, very few indicators suggest a recession apart from the unemployment rate, which is trending sluggishly. We don’t expect the Fed to implement a 50 basis point cut while the economy remains sluggish," commented Steve Englander, global head of G10 FX research at Standard Chartered.

In the broader currency landscape, the Japanese yen, which has appreciated approximately 12% against the dollar from a 38-year low in July—partly due to a rapid unwinding of carry trades and a rate hike from the Bank of Japan—is projected to be one of the biggest beneficiaries, expected to rise nearly 4% to about 139.67 yen per dollar in a year.