The Fed cutting rates won’t end the dollar cycle, it will take more than that

A topical question at the moment is around the big US dollar cycle, given that we’re headed towards Fed easing. Deutche Bank today makes a compelling case that it won’t be initial Fed cuts that end the USD cycle as it usually only turns well after Fed cuts begin and once US rate fall below the G10 median.

An obvious related dominant driver of big USD cycle tops has been the US rate
cycle. However, the lags have proved variable and longer than most anticipated at
each cycle turn. Fed funds started declining some 6 months before big USD turn in
1985 that was subsequently given a big push by G7 Plaza Accord intervention. The
2002 USD peak was even more confusing, in so much as USD rates peaked more
than a year and a half before the USD did. Both experiences suggest considerable
inertia built into “Big USD” cycles such that momentum does not “change on a
dime”.

DB also highlights that the current implied path of policy still leaves the US near the top of the G10 leaderboard on short-term rates by the end of 2025.

Why is this so interesting? Because in past rate cycles, big USD turning points
tended to be “validated” when US short-term rates went from the top half of the G10
peer ranking to the lower half. In other words there is a lot of inertia to rates, and it
is only when US rates are resoundingly low relative to a majority of G10 peers that
the USD is on a path to persistent weakness.

The US dollar has been persistently strong and is near the top of many historical ranges but that and Fed cuts alone aren’t enough to justify calling a top in the big dollar.

This article was written by Adam Button at www.forexlive.com.