The U.S. dollar has risen significantly this week, recording its best weekly performance in a month, amid market expectations on the Fed’s monetary policy decisions. The dollar index, which measures its performance against a range of major currencies such as the euro and the yen, rose to 107.05, the highest level since late November, with an increase of more than 1% since the start of the week. This performance reflects the strength of the dollar supported by expectations of a US rate cut, as traders await the Federal Reserve meeting next week.
The support received by the dollar was not limited to domestic expectations but was also boosted by interest rate cuts from the European Central Bank and the Swiss National Bank last Thursday. The move pushed the euro and the Swiss franc lower against the USD. On the flip side, the dollar has been rising against the Japanese yen amid speculation that the Bank of Japan may halt rate hikes at its next meeting, which has increased the dollar’s attractiveness to investors. In Asian markets, the USD rose 0.19% against the yen to 152.935 yen, its highest level since late November. This performance reflects investors’ preference for the USD as a safe haven, amid fears of global economic and political uncertainty.
Despite this strong performance, expectations of a further rate cut by the Federal Reserve remain limited. According to CME’s Feed Watch, expectations of another January cut are only 21%, suggesting that the pace of future cuts is likely to slow. This situation reinforces the scrutiny in the markets, as traders await clear signals from the Federal Reserve on its future direction.
The impact of the US interest rate on currencies
The expected US interest rate cut has direct effects on global currencies, as the US dollar is one of the main drivers in financial markets. When the Federal Reserve cuts interest rates, the return on dollar-denominated financial assets falls, reducing its attractiveness to investors looking for higher returns. This often leads to the dollar weakening against other currencies, especially those belonging to economies with tighter monetary policies. When the dollar weakens, rival currencies such as the euro, yen, and pound sterling may benefit from it in the short term. The depreciation of the dollar makes U.S. products and services relatively cheaper for importers, which may boost U.S. exports but weaken the competitiveness of other export-dependent countries. This decline could create pressure on other central banks to reassess their monetary policies to keep their economies stable.
At the same time, a rate cut increases liquidity in the market, which could boost demand for higher-yielding currencies in emerging markets. Investors may turn to these markets for better investment opportunities, leading to an appreciation of emerging market currencies against the dollar. Expectations of a US rate cut have a strong psychological impact on the markets, as traders begin to reassess their investment strategies based on these expectations. On the other hand, the impact of a rate cut may not always be negative on the dollar, as it depends on other factors such as the overall economic situation of the United States and the amount of the cut. If the U.S. economy shows signs of resilience and continued growth, the impact of the cut on the dollar may be limited. In addition, decisions made by other central banks play a crucial role.
The impact of dollar movements on financial markets
Dollar price movements significantly affect global financial markets, as the world’s main reserve currency and a major instrument of international trade. When the price of the dollar changes, it is reflected in many financial assets including stocks, bonds, other currencies, and commodities. Dollar movements are often the result of the outlook of the US economy and the monetary policies of the Federal Reserve, which makes them the focus of market attention. If the dollar rises, it could cause other currencies to depreciate against it, such as the euro, yen and pound. If this happens, goods and services produced in the United States may become more expensive for foreign consumers, reducing demand for U.S. exports. This may reflect negatively on the profits of American multinationals that rely on foreign markets. In stock markets, a stronger dollar could lower shares of companies that rely heavily on trade International.
On the other hand, when the dollar falls, U.S. goods become more competitive in global markets, increasing export demand. This may contribute to the profits of U.S. companies, especially those that rely on exports, and thus could lead to higher stock markets. A weaker dollar also enhances the competitiveness of other countries that export their products to the United States, contributing to an increase in their exports. The impact of dollar price movements also extends to bond markets. When the dollar rises as a result of higher US yields, it may lead to lower US bond prices, as the yield on bonds becomes less attractive compared to other investments. In contrast, when the dollar falls, the yield on US bonds may become more attractive to foreign investors, leading to increased demand for them.
