The US dollar fell after the Federal Reserve’s decision to cut interest rates by 50 basis points, which came contrary to the expectations of many experts who had expected a smaller cut, by 25 basis points. Markets were already expecting the central bank’s tilt toward monetary easing, but the big cut announced came as a surprise to many. This decline in the dollar came in conjunction with the expectations of financial markets pointing to more stealth Interest rates have fallen, expecting a further cut of 70 basis points in 2024 and 191 basis points by September 2025.
In the midst of this decline, the dollar index, which measures the greenback’s performance against a basket of six major currencies, fell 0.30% to 100.57. The dollar hit its lowest level in more than a year when it slipped to 100.21 in the previous session. This decline reflects market concerns about the economic outlook and concerns about the impact of monetary easing on the strength of the dollar. Despite the dollar’s decline, other currencies such as the Australian and New Zealand dollars saw significant support.
The Australian dollar rose 1.05% to $0.6834, while the New Zealand dollar gained 0.89% to $0.6263, after positive domestic data on the economy showed. The US dollar also rose 0.54% against the Japanese yen, indicating mixed reactions between different currencies21>.As for the euro, it increased 0.46% to $1.1169, although it remained below the three-week high hit in the previous session. The Norwegian krone also rose in London trading, after Norway’s central bank kept interest rates unchanged, but signaled plans to cut them in 2025, increasing its value by 0.64% to 10.4550 against the dollar.
Impact of interest rate cuts on inflation in United States
Lowering interest rates by the Federal Reserve can significantly affect inflation levels in the United States. When a central bank lowers interest rates, it makes borrowing less expensive, encouraging individuals and businesses to increase spending and investment. This measure can lead to increased demand for goods and services, boosting economic activity. When demand rises, companies may start raising the prices of their products to meet rising demand, leading to inflationary pressure.
In other words, the more spending, the more likely prices are to increase. Lowering interest rates can boost economic growth, but it can also create inflationary risks if demand exceeds supply. On the other hand, if interest rates remain low for a long time, it can boost inflationary expectations. If consumers feel that prices will continue to rise, they may accelerate their spending, boosting demand and increasing inflation. Therefore, the Federal Reserve enters into a complex equation, as it must strike a balance between stimulating economic growth and curbing inflation.
However, the effects on inflation are not always clear. Sometimes, expansionary monetary policies can increase productivity and spur innovation, helping to curb inflation in the long run. If companies can increase their productivity, they may be able to meet growing demand without having to raise prices significantly. Moreover, external factors can play a role in the impact of a rate cut on inflation. For example, if there is a global economic slowdown, it could reduce demand for U.S. exports, which could reduce domestic inflationary pressures. In addition, commodity prices such as oil and wheat are affected by external factors, and their fluctuations may affect inflation levels in the United States.
Relationship between dollar performance & commodity prices
The relationship between the performance of the US dollar and commodity prices is an important topic in the economy, as commodity prices are greatly affected by changes in the value of the dollar. When the dollar rises, commodities become more expensive for buyers using other currencies, which can lead to lower demand and therefore lower prices. Conversely, when the dollar falls, commodities become cheaper for international buyers .
Demand increases demand and raises prices. Commodities such as oil, gold, wheat, and other vital indicators of the global economy. The pricing of these commodities is usually based on the dollar, so any change in the value of the dollar directly affects their costs. For example, when the Federal Reserve decided to cut interest rates, the dollar often fell as a result of investors’ expectations that monetary policy would lead to an increase in inflation. This A depreciation of the dollar can lead to higher commodity prices, as those commodities are seen as a hedge against inflation. In addition, commodity prices can be affected by other factors such as changes in supply and demand, geopolitical crises, and natural disasters.
However, the relationship between the dollar and commodity prices remains fundamental. For example, if oil prices rise as a result of political tensions in the Middle East, this could lead to an increase in the prices of gasoline and other commodities in the United States, but this effect could be enhanced or offset by changes in the value of the dollar. Also, market expectations about the US economy affect the performance of the dollar. If there is optimism about economic growth, the dollar could rise, which could put pressure on commodity prices. Conversely, if there are concerns about a recession, the dollar could fall, boosting commodity prices.
