The US dollar is close to erasing all its gains for the year! Is there still room for further decline in the future?

The dollar is about to erase all its gains so far this year, as the market bets that the Federal Reserve will cut interest rates faster than expected to support the economy.

Although the Bloomberg Dollar Spot Index rose slightly on Wednesday, it remains close to its lowest level since December last year. The dollar-euro exchange rate is close to its lowest level in over a year, while the dollar-pound exchange rate is at its lowest level in two and a half years.

Short-term U.S. bond yields have risen as traders increase their bets on further rate cuts, with the two-year U.S. bond yield falling to its lowest level since the end of 2022, further flattening the U.S. yield curve.

The Federal Reserve's decision to launch an aggressive 50 basis point rate cut to kickstart loose monetary policy has put pressure on the dollar, and the debate in the market over the extent of future rate cuts by the central bank has intensified. Traders increased their bets on further rate cuts on Tuesday, with a 50% chance of another 50 basis point rate cut in November.

Lee Hardman, senior currency analyst at Mitsubishi UFJ Financial Group, said, "Since the end of July, the dollar has weakened significantly as the market has shifted towards a more aggressive outlook for Fed rate cuts. We believe the dollar will continue to weaken in the future, although to a lesser extent."

Goldman Sachs last week lowered its forecasts for the dollar against the euro, pound, yen, and other currencies, stating that the Fed's decision indicates its willingness to respond more aggressively to an economic downturn.

Strategists at JP Morgan stated that until they receive more U.S. labor market data on the Fed's rate cut path, they advise investors to maintain a "slightly and net neutral" exposure to the dollar.

There are currently no clear signs that the U.S. economy is heading into a recession. However, signs of economic pressure are intensifying, with increasing unemployment, declining excess savings, and rising default rates. The latest evidence is that data released on Tuesday showed the largest drop in consumer confidence in three years.

Federal Reserve Chairman Powell stated that the market should not view the 50 basis points as a "new rhythm" for rate cuts, but reiterated that Fed officials will continue to monitor economic activity to determine future actions. Traders will focus on U.S. economic growth and inflation data to be released later this week for clues on the dollar's direction