Analyst Joe Tuckey believes that a larger rate cut from the Federal Reserve could signal “growth concerns and economic trouble ahead.”
The U.S. dollar has been weakening ahead of a widely anticipated interest rate cut from the Fed on Wednesday, with the size of the cut determining whether the dollar will continue to decline or present a buying opportunity.
On Monday, the ICE U.S. Dollar Index fell to near its lowest levels of the year, down to 100.77 from 106.26 in April. The dollar has also hit a one-year low against the yen.
Market expectations for a significant rate cut have risen, with a 63% likelihood of a 50-basis-point reduction — the largest cut in 16 years — up from 50% last week, spurred by comments from Wall Street Journal commentator Greg Ip and former New York Fed head Bill Dudley.
Meanwhile, the chance of a smaller 25-basis-point cut fell to 37%.
A 50-basis-point cut could drive the dollar to new lows, according to Joe Tuckey, head of FX analysis at Argentex. A smaller 25-basis-point cut would likely result in less currency volatility. “The need for a larger cut points toward growth concerns and economic trouble ahead,” Tuckey said.
The U.S. dollar’s trajectory is influenced by growth prospects, Fed interest rate policy, and how U.S. rates compare to other global rates. The yen has strengthened against the dollar as the Bank of Japan is expected to raise rates again this year after ending its negative-rate policy in March. Their next policy decision is set for Friday, two days after the Fed’s.
The market is split between expecting a larger cut to avoid a recession and prevent borrowing costs from becoming too restrictive as inflation eases, and a smaller, more cautious reduction.
TD Securities strategists, including Mark McCormick, note that while the Fed’s rate forecast will shape initial market reactions, future data will drive longer-term trends. They also suggest that the dollar could rebound in the coming months as the Fed adopts a gradual approach to rate cuts.
