What’s going on here?
The US dollar index fell 4.8% in the third quarter of 2024 after the Federal Reserve cut rates by 50 basis points, prompting global central banks to adjust rates and shake up currency markets.
What does this mean?
This is the Federal Reserve’s first rate cut since 2020, and it’s putting pressure on the dollar despite the strong US economy potentially capping further cuts. As central banks globally lower rates, currencies like the Japanese yen, Norwegian krone, and Brazilian real are looking like potential winners. For instance, the yen jumped 13% from its 2024 lows amid diverging central bank policies, backed by $5.8 billion in net bullish bets. Norway’s choice to keep interest rates at a 16-year high, with no immediate rate cuts from Australia, makes these currencies more appealing. Meanwhile, Brazil’s past rate hikes for inflation control position the real as a favorable asset, despite its 10% drop against the dollar this year. With the US presidential election on November 5, more market volatility is expected, especially if a Trump win strengthens the dollar.
Why should I care?
For markets: Currency cocktails shake investment strategies.
Traders are turning their focus to undervalued currencies like the yen and Norwegian krone, as identified by Bank of America Global Research, compared to the overvalued dollar and Swiss franc. With the dollar’s path closely linked to upcoming economic data and election results, investors are employing selective strategies, backed by firms like Brandywine Global.
The bigger picture: Global rate maneuvers reshape financial landscapes.
With central banks adjusting rates worldwide, market dynamics are becoming more volatile, driven by economic changes and political events. This scenario demands a strategic approach to currency opportunities, as ongoing US labor market reports and economic indicators will signal the Fed’s next rate moves, influencing overall currency trends.
