Welcoming rate cuts, the US dollar falls to a new low at the end of the year

The Fed's rate cut expectations are rising, and the dollar fell in response, hitting a new low for the year.

As concerns about economic recession ease and risk appetite rises, the dollar is under pressure and falling. The dollar against a basket of currencies fell 2.2% to 101.39 points this month, hitting the lowest level since the first trading day of January.

As the dollar weakens, the S&P 500 stock index has regained almost all lost ground since early August, indicating a significant improvement in market sentiment.

"The market is looking for a soft landing and Fed rate cuts... this is negative for the dollar," said Athanasios Vamvakidis, head of G10 FX strategy at Bank of America.

Powell will speak at the Jackson Hole Symposium on Friday, providing new clues on the future direction of US interest rates.

The question for the rest of the year is: Do you want to short the dollar?

Rate cut expectations are gradually increasing. After strong retail sales data restored confidence in the economy, the market expects the Fed to cut rates three to four times before the end of the year; following weak jobs reports, traders are now expecting the Fed to cut rates five times this year. The CME FedWatch Tool shows that the probability of a 50 basis point rate cut in September has risen from 24% on Monday to 32.5%, with a 67.5% probability of a 25 basis point cut in September.

Vamvakidis said, "Strong consumer spending, coupled with optimism that the Fed will cut rates multiple times this year, is 'favorable for risk sentiment,' but negative for the dollar as it is 'still overvalued'."

In the first half of the year, the dollar index rose as the market was surprised by the resilience of the US economy. However, starting from the end of June, the US economic growth slowed down, and the dollar index began to decline.

Since then, the pace of the dollar's weakness has accelerated. Citigroup stated that as risk appetite recovered, investors began selling the dollar and buying other risk assets, leading to further weakness in the dollar index.

Jane Foley, head of FX strategy at Rabobank, said, "We expect the US to experience a mild recession - the economy is definitely slowing down and converging with other countries."

She added that as the euro is the biggest competitor to the dollar, the euro has been "very strong" this year, with the euro to dollar exchange rate rising by 3.6% since early July despite weak German manufacturing.

Analysts believe that the reason for the dollar's decline is that investors have abandoned the popular "carry trade," where they borrow yen to buy higher-yielding dollars, leading to a more than 7% rise in the yen against the dollar in the past month. According to the US Commodity Futures Trading Commission data, short bets on the yen reached their highest level since 2007 last month, but have sharply declined in recent weeks, with long positions appearing for the first time since 2001 last week.

"The dollar's positions have been flat, but far from expanding - now, the question for the rest of the year is: Do you want to short the dollar?" said Chris Turner, head of research at ING "The dollar view has not completely changed yet, it may have to wait until we have a clearer understanding of the speed and depth of the Fed's easing cycle before it changes," said Michael Metcalfe, Global Head of Macro Strategy at State Street