The monetary policy of the US Federal Reserve is undoubtedly one of the most watched by investors and analysts. Both for the effects it has on the global economy and for the repercussions it causes on the markets. And the development of stock markets, fixed income securities and, above all, currencies depends largely on the development of the price of silver in the North American country.
In fact, one of the most closely watched effects of Fed meetings is the one they have on the US dollar, which in 2024 is experiencing its second negative annual balance. This is clear from the evolution of Dollar Indexwhich records the price of dollar against a weighted basket of the most traded currencies on the planet.
This is a step that has not occurred since before the 2008 financial crisis and which promises to materialize by the end of the year if experts’ forecasts are followed, which according to the consensus of the markets are counting on the dollar falling below the levels it now trades in against currencies such as the euro, Japanese yen or pound sterling.
“According to current market projections, the interest rate differential (the US interest rate relative to other markets) will erode, compromising interest rate support for the dollar,” he explains. Benoît-AnneManaging Director of the Investment Solutions group MFS Investment Managementwhich, taking into account all risk factors, leans “slightly” towards a weaker dollar in the near future.
From Ebury, a fintech specializing in currencies, they see the “US dollar weaker against most of its major peers in 2025, as there is room for further tightening as the US economy slows after recorded strong outperformance (especially if the country’s labor market continues to cool) and Europe is recovering after a few years of lethargy.
And the initial aggressive easing of monetary policy in the United States could put some downward pressure on the U.S. currency, with positive implications for other developed markets and active emerging markets.
This is why Supriya Menon, head of multi-asset strategies for the EMEA region at Wellington Management, assures that “from the point of view of European investors, we are very attentive to the evolution of trade and foreign policy, as well as ‘to the effects of fiscal and foreign policies’. other domestic policies on the evolution of American interest rates and the American currency.
In this sense, experts agree that the deterioration of the labor market will be essential to know whether the scenario for the coming months continues to indicate a more gradual pace of decline in rates which will lead to a consequent fall in the dollar.
As a result, the euro/dollar also sees its second consecutive year of rise in 2024, which has not been seen in the last decade. More precisely since 2012-2013, which indicates less aggressiveness on the part of the ECB which pushes the euro to strengthen.
The other times there were two years of falls, what happened next?
“Extrapolating the Federal Reserve’s position toward the future, One could argue that a cheaper dollar and a possible asset bubble are now more likely, while a hard landing is less likely. But if you’re looking for reasons to worry, consider that In both 2001 and 2007, the Fed began its easing cycles with 50 basis point cuts three months before the recession hit. says Linda Duessel, senior equity strategist at Federated Hermes.
That is, the last time there were two consecutive years of decline in the dollar, the Fed also undertook a decline giant interest rates. And it is not excluded that after last week’s mega-cut, a new cut of 50 basis points will occur at once for the next meeting (November 7). Especially, after several second swords of the Federal Reserve will not close the door to a new giant cutout.
It is for this reason that more and more voices are being raised in favor of a massive rate cut, taking into account the evolution of the dollar and the projections of experts for the dollar. Even if not all voices go in the same direction. From Ebury, they assure that “in the short term, there is room for a rebound in the dollar, because expectations of a Fed rate cut and a recession in the United States seem exaggerated.”
From eToro, for their part, they add that the strength or weakness of the dollar in the coming months and in 2025 “will be influenced by key factors such as the monetary policy of central banks, inflation and expectations for its subject, as well as indicators such as PMI data, which will also play an important role in the valuation of currencies And all this, without losing sight of the results of the elections in the United States in November.
