The Federal Reserve's "interest rate cut wave" is coming, and the US dollar is back on the downtrend, about to erase all of this year's gains.

On Wednesday, although the Bloomberg US Dollar Spot Index rose slightly, it was still less than one percentage point away from its lowest level since December last year, close to its lowest level since January. The US dollar was close to its lowest level against the euro in more than a year, and its lowest level against the British pound in two and a half years.

The Federal Reserve cut interest rates by 50 basis points last week, starting a loose policy, which put pressure on the US dollar. Traders further predict that there is a 50% chance of another 50 basis point rate cut in November.

On the 23rd, UBS said in a research report that the US dollar will weaken in the medium term. In addition, the sensitivity of the interest rate market to weak US data has increased. This means that if the US labor and inflation data are lower than expected, it will further weaken the US dollar.

Advertisement

More and more analysts are cautious about the future of the US dollar.

Although there is no obvious sign that the US economy is in a recession, more and more analysts are starting to be cautious about the future of the US dollar.

Lee Hardman, a senior foreign exchange analyst at Mitsubishi UFJ Financial Group, said: "As the market shifts to the prospect of the FOMC adopting a more active loose policy, the US dollar has weakened significantly since the end of July. We believe that the US dollar may further weaken in the future, although the range will be relatively moderate."

Goldman Sachs lowered its exchange rate forecasts for the US dollar against the euro, the British pound, and the Japanese yen last week, saying that the Federal Reserve's decision shows its willingness to deal with economic recession more actively than other currencies.JPMorgan strategists have indicated that they will maintain a "modest and net neutral" exposure to the US dollar until further US labor market data more clearly delineates the Federal Reserve's interest rate path.

UBS also noted in its latest research report that the Federal Reserve's 50 basis point rate cut aligns with market expectations, but this is only the beginning. Should future US economic data weaken, it will further drive interest rates lower, leading to a further weakening of the US dollar.

UBS: Anticipates medium-term US dollar weakness

UBS believes that despite the mixed reactions in the foreign exchange market to the Federal Reserve's 50 basis point rate cut, the US dollar is expected to weaken in the medium term due to the increased sensitivity of the interest rate market to weak US data.

Historically, after the start of a rate-cutting cycle, US short-term interest rates quickly fall below the "neutral" level (that is, neither stimulating nor inhibiting economic growth).

"This does not necessarily imply that a recession is imminent, but rather because the extent of a recession is difficult to determine in advance, the market tends to price in various growth outcomes (including very negative ones)."

UBS also pointed out that due to other central banks having cut rates by a smaller margin so far, the forward implied carry advantage of the US dollar has begun to diminish, especially after the start of the easing cycle.

"This may continue to focus attention on the yen, as it is the currency with the highest interest rate beta."It is worth noting that, despite some institutions adjusting their positions, overall, the market's short positions on the US dollar have not increased significantly, indicating that the market's bearish sentiment towards the US dollar remains relatively cautious.