"Weak US Dollar" Becomes the Theme of the Forex Market? The US Dollar Index is about to erase all gains by 2024

According to the financial news app Zhitong Finance, the US Dollar Index, which measures the strength of the US dollar against a basket of currencies, is set to erase all its gains so far this year. This is because foreign exchange traders are betting that the Federal Reserve will cut interest rates faster than previously expected to support the US economy. Despite a slight increase in the Bloomberg Dollar Spot Index on Wednesday, it remains less than one percentage point away from its lowest level since December last year, indicating the imminent erasure of the year's gains. The US dollar is trading near its lowest level against the euro in over a year, while the US dollar against the British pound is at its lowest level in at least two and a half years.

The Federal Reserve's decision to start a loose monetary policy with a significant 50 basis point rate cut, and the prospect of a substantial 200 basis point rate cut by the end of next year, undoubtedly puts immense pressure on the US dollar. The market debate over the extent of the recent rate cuts, specifically the rate cuts before the end of this year, is intensifying. On Tuesday, futures traders increased their bets on further easing by the Federal Reserve, with the CME "FedWatch Tool" showing that the probability of the Fed announcing another 50 basis point rate cut in November exceeded 50% at one point.

"Since the end of July, as the market shifted towards the prospect of a more aggressive loose policy by the Federal Open Market Committee (FOMC), the US dollar has significantly weakened," said Lee Hardman, senior foreign exchange analyst at Mitsubishi UFJ Financial Group (MUFG). "We believe that the US dollar is likely to weaken further in the future, although the extent of the weakening may be relatively small."

Wall Street's Bearish View on the US Dollar

Despite being bullish on the US dollar for a long time, even Goldman Sachs, a major Wall Street bank that remained bullish on the US dollar on the eve of the Federal Reserve's rate cut, unexpectedly lowered its exchange rate expectations for the US dollar against the euro, pound, yen, and other currencies last week. Analysts at the bank stated that the Fed's decision to cut rates significantly beyond expectations indicates that the Fed is willing to take a more proactive approach to potential economic downturns than central banks around the world.

Meanwhile, the foreign exchange strategy team at JP Morgan stated that they will maintain a "slightly and net-neutral" US dollar exposure until further US labor market data clarifies the Fed's easing rate path.

Fortunately, there are currently no clear signs indicating that the US economy is in a recession. However, signs of economic slowdown continue to emerge, including an increase in unemployment, a sharp slowdown in non-farm employment, a gradual depletion of the trend of excess savings, and a rise in delinquency rates. On Tuesday, the latest survey data showed the largest drop in the US consumer confidence index in three years.

Federal Reserve Chairman Jerome Powell stated at a press conference following the Fed's announcement of a 50 basis point rate cut that the market should not assume that 50 basis points is a "new pace of rate cuts," but emphasized that officials will continue to monitor economic activity to determine future rate policy measures. Foreign exchange traders looking for clues on the US dollar's direction will likely closely monitor the US economic growth and inflation data later this week to gauge whether the US economy remains resilient In contrast to the US dollar index, short-term Treasury bond prices have been rising since September, reflecting financial institutions' increasing bets on the Federal Reserve's more aggressive easing policies. The 2-year US Treasury yield is the most sensitive to interest rate expectations, and its continuous decline indicates a growing market expectation of interest rate cuts. Currently, the 2-year US bond yield has dropped to the lowest level since the end of 2022, further steepening the US bond yield curve.

"Weak US Dollar" Becomes the Current Trading Theme in the Foreign Exchange Market?

With more data showing a slowdown in the US economy, the prospect of aggressive interest rate cuts by the Federal Reserve, currently priced in by financial markets, has put significant pressure on the US dollar exchange rate against a basket of major global currencies. The US dollar index experienced its worst performance of the year in August and continued to weaken in September, indicating that the "weak US dollar" trend has become a trading consensus among foreign exchange traders.

Sophia Drossos, a market strategist and economist at the US asset management giant Point72 Asset Management, recently stated in an interview that as the Federal Reserve is about to start a new cycle of lowering borrowing costs and with other regions around the world showing signs of economic optimism driven by rate cut expectations, the US dollar exchange rate against other sovereign currencies is clearly entering a downward trend. Drossos' call is consistent with the views of Wall Street strategists on the future weakness of the US dollar.

During the Federal Reserve's interest rate cut cycle, the price of gold priced in US dollars has continued to rise, seemingly becoming the consensus expectation of most Wall Street market strategists and economists. The strategy team at the global top asset management firm Pimco stated that since the 1990s, during the Federal Reserve's initial interest rate cuts, the US dollar often temporarily weakened, and as policy normalizes, the US dollar may lose its status as a high-yield currency, facing mild depreciation pressure.

Goldman Sachs, known as the "commodities flag bearer" on Wall Street, had previously declared the start of a bull market in commodities earlier this year. However, recently Goldman Sachs has frequently changed its stance, stating that the "commodities 5D bull market" discussed at the end of May is unlikely to materialize, with gold being the only global asset class it remains bullish on.

The analysis team at the international bank UBS has set a mid-2025 gold price target of $2700 per ounce, while expecting an acceleration in gold ETF demand in the coming months. Another Wall Street bank, Citigroup, predicts that driven by the Federal Reserve's interest rate cut cycle, strong ETF demand, and off-exchange physical demand, the gold price may reach $3000 per ounce by mid-2025 and $2600 per ounce by the end of 2024