Dollar Dives as Traders Anticipate Fed Rate Cuts

The U.S. dollar plummeted to multi-year lows against both the euro and the British pound on Thursday. This broad selloff reflects the growing belief among investors that the Federal Reserve will soon slash interest rates more aggressively than previously thought.

Central Bank’s Shifting Stance

The dollar’s value declined significantly as traders responded to indications that the Federal Reserve may ease monetary policy. According to analysts, the market has priced in a more dovish approach. The Fed’s Chair, Jerome Powell, was seen as more accommodating during his congressional testimony.

Powell stated the central bank would have likely continued to cut rates if not for inflation linked to tariffs. Despite this, he maintained that the Fed should hold steady for now, anticipating rising price pressures during the summer. A new Fed Chair, expected to be more accommodating, is set to be nominated next year by President Donald Trump, whose term ends in May.

“This week it’s definitely been about the Fed, the prospect of easing sooner and potentially more rate cuts,”

—Eric Theoret, FX strategist at Scotiabank

Data from the Labor Department indicated the number of Americans applying for jobless benefits fell last week, though continuing claims climbed to the highest level since November 2021. Recent data show the U.S. inflation rate is holding steady at 3.3%, according to the Consumer Price Index (BLS).

Market Reactions and Currency Movements

Traders in the market are now factoring in around 65 basis points of rate cuts by year-end, a significant increase from the 46 basis points priced in the previous Friday. The initial cut is anticipated in September. The euro advanced to its highest level since September 2021, while the pound also reached levels last seen in October 2021.

The Swiss franc hit a 10-1/2-year high. The dollar’s decline was also evident against the Japanese yen. The anticipation of lower interest rates undermines the dollar’s advantage against other currencies. This comes as investors are worried that tariffs will slow down U.S. growth.

The Trump administration has set a deadline of July 9 to negotiate deals to avoid reciprocal tariffs with trading partners. International investors are also reallocating away from U.S. assets due to economic concerns and the outlook for the U.S. currency.

“The result of U.S. asset outperformance over the past decade is you’ve got a lot of asset managers that are long the U.S. dollar way more than I think they’re comfortable,”

—Theoret

In the cryptocurrency market, bitcoin experienced a modest decrease.