US Dollar Outlook for August 2024

In July, the US dollar faced a downturn against major global currencies. It slipped from 1.0717 to 1.0820 against the euro and tumbled from 160.84 to 150.46 against the yen. The Federal Open Market Committee (FOMC) maintained the federal funds rate steady at 5.25% to 5.50% during its July meeting. Additionally, the FOMC continued its quantitative tightening (QT) program, albeit at a slower pace—reducing US Treasury bonds from $60 billion to $25 billion monthly while keeping mortgage-backed securities (MBS) reductions at $35 billion per month. Notably, the FOMC adjusted its 2024 median dot plot, scaling back from three anticipated rate cuts to just one.

The overall performance of the US dollar in July was lacklustre, with the DXY index dropping by 1.7%, heavily influenced by the strengthening yen. During the Fed's July meeting, Chair Powell hinted at the possibility of a rate cut in September, contingent upon favourable data trends. This dovish stance mirrored growing concerns over the resilience of the labour market, with key indicators like ADP employment figures and consumer confidence data showing signs of weakness. Both the manufacturing and services sectors displayed contraction signals, with employment indices falling below the critical 50.0 mark.

Inflation trends showed signs of stabilization, nearing the Fed's target after seasonal spikes in early 2024. Core PCE inflation rates for May and June were notably low, the weakest since late 2023. This supported the argument for the Fed to consider easing measures, potentially starting in September.

Looking ahead, while the Fed seems prepared to begin easing monetary policy, expectations for the US dollar remain modest. The market has already priced in nearly three rate cuts by the year's end. Other G10 central banks are also on the verge of, or have already started, cutting rates. This global trend, combined with ongoing economic concerns from China and political uncertainties in the US, suggests a tempered outlook for the dollar's weakness.

Political dynamics in the US add another layer of complexity. The upcoming presidential election introduces uncertainties that could affect market sentiment. Although the probability of significant political upheaval remains low, any shifts in policy, especially regarding tariffs, could influence the dollar's strength.

In Europe, the reduction of political risks and the potential for a more aggressive Fed policy by year-end have led to slight adjustments in the dollar's projections for Q3 and Q4, although forecasts for 2025 remain unchanged. A softening US labour market and rate cuts are expected to weigh on the dollar, but global growth concerns and US political factors will likely limit the extent of dollar selling.

As the Fed transitions towards an easing cycle, potentially starting in September, the dollar is expected to face downward pressure. However, the scale of this weakness will be moderated by global economic conditions and political developments in the US. The initial rate cut is anticipated to be 25 basis points, with the possibility of larger cuts if economic conditions worsen. This evolving landscape underscores the complexity and interdependence of monetary policy, economic data, and geopolitical factors in shaping the US dollar's trajectory.

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