The Fed is poised to cut interest rates. Will a "weak US dollar" be the theme of the next phase in the foreign exchange market?

According to the financial news app Zhitong Finance, Sophia Drossos, a market strategist and economist from the American asset management giant Point72 Asset Management, recently stated in an interview that as the Federal Reserve is about to start a new round of lowering borrowing costs and economic optimism is gradually emerging in other parts of the world due to expectations of interest rate cuts, the exchange rate of the US dollar against other sovereign currencies is entering a clear downward trend.

The market's current pricing of the Fed's interest rate cuts has already put tremendous pressure on the US dollar exchange rate. The US dollar index against a basket of major global currencies experienced its worst performance of the year in August. Pricing data from the interest rate futures market shows that traders generally expect the Fed to cut rates by 100 basis points by the end of this year, and potentially by as much as 200 basis points by the end of 2025.

Sophia Drossos from Point72, interviewed in New York, stated that with the high probability of the US dollar continuing to weaken, all major currencies globally will benefit from the weak trend of the US dollar. The euro and the Brazilian real are expected to see the largest rebound against the US dollar. "This is the beginning of a new trend of US dollar weakness," she said. "As the Fed begins its rate-cutting cycle, other central banks will follow suit with rate cuts, and we will see stronger global economic growth prospects."

Sophia Drossos's call from Point72 has intensified the divergent views among Wall Street strategists on the future direction of the US dollar. Some strategists insist that due to the ongoing global economic weakness forcing major central banks around the world to cut rates faster than the Fed to stimulate domestic economic growth, the US dollar is likely to remain strong.

Drossos expects the European Central Bank to cut rates much slower than market expectations, which will benefit the euro. In Brazil, policymakers at the central bank are expected to start raising rates on Wednesday, which will boost the real exchange rate. Drossos emphasized that the real looks very cheap after experiencing a sell-off this year. She also noted that in Latin America, another potential trend in foreign exchange trading lies in the Mexican peso exchange rate becoming very "tricky" as comprehensive judicial reforms are underway.

Interest rate futures traders are discussing whether, after the unexpected rise in US retail sales data in August, indicating that US consumer spending remains resilient, the Fed will start its normalization of rate cuts with a modest 25 basis points, or begin its aggressive easing policy with a larger rate cut, which remains unknown in the interest rate market.

However, she added in the interview that she personally expects the Fed to choose a small rate cut of 25 basis points, but such a decision may trigger a subconscious sell-off reaction from many investors, as they have anticipated larger rate cuts and priced this expectation into the stock, bond, and foreign exchange markets. In other words, expectations of a Fed rate cut of at least 50 basis points or more have already been reflected in trading in the stock, bond, and foreign exchange markets. If the Fed fails to cut rates by 50 basis points or more, Short-term stocks and bonds may face selling pressure, while the US dollar is expected to rebound in the short term.

Point72 economist and strategist Delossos stated in an interview that the US economy is robust, which is a net positive for the entire financial market. The possibility of a "soft landing" for the US economy remains very high, making a preliminary 25 basis point rate cut by the Federal Reserve more appropriate.

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

Dubbed the "commodities flag bearer," Wall Street giant Goldman Sachs had previously declared multiple times earlier this year that the commodity bull market had begun. 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. Now, the only asset class Goldman Sachs is bullish on is gold. Another Wall Street giant, Citigroup, projects that driven by the Federal Reserve rate cut cycle, strong ETF demand, and off-exchange physical demand, the price of gold may reach $3,000 per ounce by mid-2025 and $2,600 per ounce by the end of 2024