Global Largest Bond Fund Warning: Fed's First Rate Cut in Nearly Four Years May Weaken the US Dollar Further!
The world's largest bond fund Pimco has warned that the Federal Reserve is about to cut interest rates for the first time in four years, which may lead to a further weakening of the US dollar. With market expectations for rate cuts, investors are nervous, causing the 10-year US Treasury yield to drop to its lowest level in over a year, while the price of gold has reached a recent high. Pimco's analysis points out that historically, after the first rate cut by the Federal Reserve, the US dollar usually experiences a short-term decline followed by a rebound. Rate cuts may lead to the US dollar losing its status as a high-yield currency, facing depreciation risks
As the market awaits the expected policy shift by the Federal Reserve next week - the first rate cut in four years - investors are becoming quite nervous.
Traders have been buying US Treasuries in large quantities, pushing the yield on the 10-year Treasury to its lowest level in over a year earlier this week, while the price of gold has already surpassed recent record highs.
However, the US dollar has lost some of its shine - in the months following the Fed's more cautious approach to rate cuts compared to other major central banks, the dollar has been declining as inflation eases.
Marc Seidner, Chief Investment Officer of Non-Traditional Strategies at Pacific Investment Management Co (Pimco), and the company's portfolio manager Pramol Dhawan, stated that since the 1990s, around the Fed's past initial rate cuts, the dollar tends to temporarily decline.
"In past rate-cut cycles, whether hard or soft landing, the dollar tends to decline on average first, then rebound in the months following the initial rate cut," they wrote in a client report on Thursday.
The chart above shows the average performance of the US dollar index in the 60 weeks before and after the Fed's initial rate cut since the 1990s, as well as the subsequent 120 days.
"We believe that as policy normalizes, the dollar may lose its status as a high-yielding currency and could moderately depreciate," the Pimco team wrote.
Former Fed Vice Chairman and current Pimco executive Clarida stated that a 50 basis point rate cut "does not necessarily guarantee a positive reception or boost confidence 100%, which could lead the market to think, 'Wow! Does the Fed know something we don't know?'"
After the European Central Bank cut its deposit rate for the second time since June by 25 basis points, bringing its benchmark rate to 3.5%, European stocks closed higher on Thursday.
The US dollar faces the risk of losing its gains since the beginning of 2024. The chart below shows a series of sharp downward trends in the dollar since it peaked above 106 against a basket of competing currencies in April.
According to FactSet data, the dollar index fell by 0.2% on Thursday but is still on track for a 0.3% increase this week. The index has accumulated a 0.2% increase year-to-date