(Bloomberg) — The US dollar is on the verge of erasing all of its gains this year on bets the Federal Reserve will slash rates at a faster pace than previously expected to support the economy.
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The Bloomberg Dollar Spot Index is 0.5% away from its lowest level since December, paring year-to-date gains of almost 5%. Against the euro, the dollar is near its weakest level in over a year, while versus the pound, it is at the lowest in two and a half years.
The Federal Reserve’s decision to kick start policy easing with a big half-point interest-rate cut is weighing on the greenback, and the debate over the magnitude of future reductions is intensifying. Traders ramped up wagers on further easing Tuesday, to price a 50% likelihood of another half-point cut in November.
“The US dollar has weakened notably since late July as the market pivoted to the prospect of more aggressive easing by the FOMC,” said Lee Hardman, senior currency analyst at MUFG. “We see the dollar vulnerable to further weakness going forward, although on a more modest scale.”
Goldman Sachs Group Inc. last week lowered its forecast for the dollar against a wide range of currencies including the euro, pound and yen, saying the Fed decision demonstrated its willingness to respond more aggressively than peers to an economic downturn.
JPMorgan Chase & Co. strategists said they are keeping dollar exposure “light and net-neutral” until additional US labor market data gives better clarity on the Fed’s rate path.
Traders looking for clues on the dollar’s path will next turn to US growth and inflation figures later this week. The latest evidence of a weakening economy came Tuesday, when data showed consumer confidence fell by the most in three years.
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