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View: Why US Fed rate cuts may not weaken dollar

The US dollar will weaken as the rest of the world strengthens.

Jul 23, 2019, 07.57 PM IST
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By Bhavik Patel

The US Federal Reserve rate cuts have been accompanied by a weaker currency, but we are not very certain that we could see heavy dollar weakness. The IMF recently stated that the dollar was overvalued by 6-12 per cent looking at the US fundamentals.

Even US President Donald Trump wants a weaker US currency and has formed a committee to look into how to weaken the greenback. Since, the US dollar is a global reserve currency, for it to weaken, other currencies will have to rise. It is other currencies that we are worried about. Where will they get their strength from?

The US economy is chugging along nicely, even as it has started to get hiccups looking at weak economic data. Still their GDP is around 2.3 per cent, which is far better than other European countries and China. Yes, the Chinese GDP was at 6.2 per cent, but its growth was slowest in 26 years.

The more likely outcome is a modest dollar weakness at best, and at worst no dollar strength.

Below is the chart of US Federal funds rate and the US Dollar Index.


This chart will break some of the myths where US Dollar index (DXY) weakened during the time the Fed was increasing rates from 2004 to 2007. When global crash came during 2008 to 2010, we could see DXY appreciating when the rates were cut to zero. Now when the US Fed started increasing rates from 2016, we could see DXY going nowhere and trading in a range.

The Fed may be gearing up for a sustained easing cycle, but they won’t be aggressive. Usually the central bank starts cutting rates when the US is near or in recession.

At present, the US is near to recession and by the end of 2019, the economy is expected to grow by 2 per cent, and this does not warrant aggressive rate cuts.

The US dollar will weaken as the rest of the world strengthens. But the reality is Europe, Japan, China and other emerging markets are far weaker than the US economy. The dollar can’t weaken much because there is no counter cycle. It is true that Trump wants a weaker US currency and he is thinking of intervention, but it would be difficult to implement.

We expect modest dollar weakness at best, and at worst no dollar strength going forward.

(Bhavik Patel is Senior Technical Analyst of Commodities at Tradebulls Securities. Views and recommendations given in this section are the analyst's own and do not represent those of Please consult your financial adviser before taking any position in the securities mentioned)
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of
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