Rising interest rate cut expectations + Resurgence of banking risks, the US Dollar Index may record its largest weekly decline since July
Due to the Federal Reserve's dovish signals and market concerns about the risks facing regional banks in the United States, the U.S. dollar index has fallen for the fourth consecutive day. If it maintains its current level by Friday's close, it will record the largest weekly decline since July, with a drop of 0.5%. The market expects the Federal Reserve to cut interest rates by 53 basis points before the end of the year. The sharp decline in regional bank stock prices and the easing of international political risks have also exacerbated the weakness of the dollar. Although long positions still favor a stronger dollar, short-term sentiment has turned pessimistic
According to the Zhitong Finance APP, due to dovish signals from Federal Reserve officials and renewed concerns about risks in U.S. regional banks, the U.S. dollar index has fallen for the fourth consecutive trading day. If it maintains its current position by Friday's close, this week will be the worst in over two months (since July).
As indicated by the U.S. dollar spot index, the weekly decline has expanded to 0.5%, marking the largest single-week drop since July, while the yield on two-year U.S. Treasury bonds has fallen to a three-year low. Traders' bets on the Federal Reserve's easing policy have significantly increased, with the market currently expecting a cumulative rate cut of 53 basis points by the end of the year, further strengthening from Wednesday's expectation of 46 basis points.
Federal Reserve Governor Christopher Waller pointed out on Thursday that the Fed can continue to steadily cut rates by 25 basis points to support the currently pressured labor market; another governor, Stephen Milan, reiterated that doubling the rate cut by 50 basis points this month is reasonable.
Despite the U.S. government shutdown entering its third week with no clear resolution timeline and a lack of economic data releases, the dovish statements from Federal Reserve officials have still prompted investors to further increase their dovish bets.
Morgan Stanley economist Michael Gapen's team emphasized in a report that the lack of economic data has not hindered the Fed's decision-making, and they expect a 25 basis point rate cut at the October meeting.
Another factor contributing to the dollar's weakness is the sharp decline in regional bank stock prices—impacted by concerns over tightened lending standards, related stock prices have plummeted, while the easing of political risks in Japan and France has also weakened the dollar's safe-haven appeal.
Analysts Chris Turner and Francisco Pesole from ING believe that multiple negative factors are impacting the dollar: the repricing of the Fed's dovish policy, progress in the Ukraine ceasefire, falling oil prices, and ongoing U.S.-China trade tensions, all contributing to the dollar's difficulty in finding a bottom amid the sell-off.
According to anonymous traders, hedge funds betting on the appreciation of the dollar against the yen and euro earlier this month have triggered stop-losses, while institutional investors are generally taking a wait-and-see approach.
In the options market, although long positions still favor a stronger dollar, short-term sentiment has turned pessimistic.
Currently, the dollar has retraced about one-third of its rebound from a three-year low last month. European traders point out that market confidence remains fragile, with investors mostly adopting short-term trading strategies, and major currency pairs are gradually returning to recent average levels
