US Dollar Posts Worst Week Since July as Rate Cut Bets Intensify
The dollar index sank to a one-month low as signs of a cooling U.S. economy fueled speculation of an imminent Federal Reserve policy shift, boosting equities and commodities.
The U.S. dollar has concluded its worst weekly performance in over four months, pressured by a growing chorus of investors betting that the Federal Reserve is poised to cut interest rates before the end of the year. The sell-off provided a significant tailwind for U.S. equities and commodities, which typically benefit from a weaker greenback.
The U.S. Dollar Index (DXY), which measures the currency against a basket of major trading partners, tumbled to a one-month low, capping a weekly decline of over 0.7%. The slide was fueled by fresh signs of a softening U.S. economy, strengthening the case for the central bank to ease monetary policy to support growth.
Driving the sentiment shift is a cascade of weaker-than-expected economic data. The Federal Reserve's recent Beige Book, a summary of economic conditions across the country, noted a modest decline in employment in several districts and little to no overall growth. This has intensified market conviction that the Fed's next move will be a cut, with futures markets now pricing in an approximately 87% to 96% probability of a 25-basis-point rate reduction at the upcoming December 9-10 meeting.
The macroeconomic implications of a weaker dollar are far-reaching. For Wall Street, it provides a direct boost to the earnings of U.S. multinational corporations. Companies that generate a significant portion of their revenue overseas, such as technology giants and consumer staples firms, see those foreign sales translate into more dollars, enhancing their profitability.
Commodity markets also received a lift. Gold, which is priced in dollars, surged to multi-month highs as the weaker currency made it cheaper for foreign buyers. The precious metal is often seen as a hedge against currency debasement and economic uncertainty, further increasing its appeal amid the shifting Fed outlook.
"The market is increasingly convinced that the Fed's hiking cycle is not only over, but that a reversal is imminent," noted a market strategist at UBS in a recent client note. "This has triggered a significant repricing in currency markets, with the dollar bearing the brunt of the adjustment."
Investors are now looking ahead to the final major economic data releases of the year and, most critically, the Federal Reserve's final policy meeting. Any deviation from the widely anticipated rate cut could trigger a sharp reversal, but for now, the path of least resistance for the dollar appears to be lower.