Here's a snapshot of the month-to-date (MTD) changes among major currencies against the dollar as a benchmark. That and how things have played out after the Fed last week, alongside what other major central banks did during the month.
Outside of the yen, the dollar has weakened significantly against the rest of the major currencies bloc post-Fed. In particular, the higher beta currencies are the ones taking advantage. A more positive risk sentiment is also helping with that but in the case of the aussie and sterling, it's also the fact that the RBA and BOE are continuing to maintain a more restrictive policy stance.
The thing that the Fed has shown this month is that they can be hurried into a decision by markets. So, the key variable driving the pace of rate cuts now will be how economic developments play out.
The response this week shows market players are comfortable with envisaging a soft landing scenario. But if US data points to a soft-er landing, I reckon they might get a little pushy to try and get the Powell & co. to exercise the Fed put even quicker.
As things stand, Fed funds futures are showing ~59% odds of a 50 bps rate cut for November already.
2-year Treasury yields being weighed down to 3.52%, its lowest level in two years, is also not helping with dollar sentiment for now. That even as 10-year yields are keeping steadier at 3.74%.
I am sympathetic to the argument that the Fed might be cutting faster and getting to the end rate at a much quicker pace than everyone else. And when the dust settles, Fed funds rate being at around 3% or more will still be very much attractive compared to the rest of the majors.
In that lieu, central banks which are cutting slower will have to play catch up in cutting rates quicker in the future. So, that's another point to argue that the dollar might return back to favour.
But for now, the market focus is still largely on how quickly the Fed will cut and not on where rates might end up being at the end of the cycle just yet. And until that focus shifts, the dollar might find itself in a more vulnerable position during the interim.
