The Fed's interest rate cut cycle kicks off tonight! Will the US dollar enter a new era of depreciation?
The Fed's interest rate cut cycle is about to begin. Strategist Sofia Delrosos stated that the US dollar will enter a depreciation trend, with August being the worst-performing month for the dollar. She believes that as the Fed cuts interest rates, major global currencies will benefit, especially the Euro and the Brazilian Real. Despite some strategists being optimistic about the future of the US dollar, Delrosos expects the European Central Bank to cut interest rates slower than expected, while Brazil will start raising rates. The Fed may choose a small rate cut, to which the market will react sensitively
Sophia Drossos, a strategist and economist at Point72 Asset Management, stated that as the Federal Reserve begins to lower borrowing costs and optimistic signs emerge in economies around the world, the US dollar is entering a downward trend.
The prospect of Fed rate cuts has already put pressure on the US dollar, making August the worst-performing month for the dollar this year.
The US Dollar Index accelerated its decline in August
In an interview in New York, Drossos said that as the US dollar continues to weaken, all major currencies globally will benefit, with the Euro and the Brazilian Real expected to be the biggest winners.
"This (Fed rate cuts) marks the beginning of a new trend of US dollar weakness," she said. "As the Fed starts cutting rates and other central banks follow suit, we will see stronger global economic growth prospects."
Drossos' views highlight the increasing divergence among strategists on the direction of the US dollar. Some predict that despite global economic weakness forcing central banks to accelerate rate cuts to stimulate domestic growth, the US dollar will remain strong even after the Fed cuts rates.
However, Drossos expects that the European Central Bank's rate cuts will be slower than market expectations, benefiting the Euro.
In Brazil, policymakers are expected to begin raising rates on Wednesday, which will boost the Real. Additionally, Drossos pointed out that after this year's sell-off, the Real now looks cheap.
On the other hand, Drossos noted that the outlook for the Mexican Peso has become "tricky" due to the passage of a comprehensive judicial reform.
After 8 retail sales data unexpectedly rose, indicating resilience in US consumers, traders are still debating whether the Fed will start a monetary easing cycle with a 25 basis point rate cut or opt for a larger cut.
In this regard, Drossos expects the Fed to choose a small rate cut, which may trigger a subdued market reaction as many investors have already priced in more aggressive rate cut measures