- State Street sees downside risk building as markets may be underestimating the scale of potential monetary easing.
- Investors currently expect two cuts, but a shift toward three could accelerate currency hedging flows.
- Leadership uncertainty at the Fed may amplify expectations of looser policy and reshape asset positioning.
Strategists at State Street have cautioned that the US dollar could decline by as much as 10% this year if the Federal Reserve (Fed) delivers more rate cuts than markets currently anticipate. The warning comes as the currency is already experiencing its weakest stretch in almost a decade.
Speaking at a conference in Miami, State Street strategist Lee Ferridge said that while two rate reductions represent a reasonable base case, the balance of risks points toward additional easing. He indicated that three cuts are possible if financial conditions loosen further.
The Federal Reserve’s target rate currently stands at 3.50–3.75%, and investors are pricing in two cuts this year, with June viewed as the likely starting point according to CME Group’s FedWatch Tool. Two policy meetings are scheduled before then.
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How Easing Cycles Impact the Dollar
Lower US interest rates typically reduce the appeal of dollar-denominated assets, particularly for overseas investors seeking stronger returns. As yield differentials narrow, foreign holders often increase currency hedging activity, selling dollars to preserve returns, which can intensify downward pressure on the currency.
Additional softness could emerge if Kevin Warsh, nominated by President Donald Trump to replace Jerome Powell as Fed chair, ushers in a more aggressive easing cycle. A leadership change signalling faster cuts could heighten expectations of looser policy and further weaken the dollar.
Historically, periods of dollar weakness have coincided with stronger performance in risk assets such as Bitcoin. However, that inverse relationship has not been consistent, with broader market sentiment and positioning also shaping price movements.
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