The financial world is entering a period of significant transition. The US dollar (USD), once viewed as a 'fortress' of stability in the global monetary system, is experiencing a clear weakening. The primary reason stems from the increasing expectation that the Federal Reserve (Fed) will start cutting important interest rates as soon as next September.

This development not only affects the forex market (Forex) but also spills over into the commodities, equities, and especially cryptocurrency markets – fields that are sensitive to changes in liquidity and global risk appetite.

1. Why is the USD Weakening?

The decline of the USD is the result of many intertwined factors, from domestic economic data to changes in the international financial landscape:

  1. Cooling inflation

    • CPI and PCE – two important inflation indicators – are continuously slowing down.

    • This indicates that the aggressive interest rate hikes over the past two years have had an effect, relieving the Fed from the pressure to maintain high rates.

  2. The labor market is less strained

    • New job creation and wage growth are both slowing down

    • The Fed has more room to loosen policy without worrying about a wage-price spiral.

  3. Economic growth is slowing down

    • Retail sales, industrial output, and services all show signs of 'cooling down'.

    • Moderate declines help foster expectations of a 'soft landing' rather than a severe recession.

  4. Comparison with other central banks

    • The ECB and BoJ are maintaining a tightening stance or considering interest rate hikes.

    • A stronger Euro and Yen exert downward pressure on the DXY index.

  5. Expectations for Fed rate cuts

    • Markets often lead policy. Investors have started selling USD before the Fed officially 'green lights' it.

2. What Drives Expectations that the Fed Will Cut Interest Rates?

The Fed has a dual mandate: full employment and price stability. Currently, both conditions are laying the groundwork for a rate cut move:

  • Inflation nearing 2%: Core PCE is steadily declining, reducing the pressure to maintain high rates.

  • The labor market remains strong but not overly hot: Unemployment remains low, new jobs are gradually decreasing, avoiding the risk of a labor cost explosion.

  • Economic growth slows down: This gives the Fed a reason to loosen policies to support consumption and investment.

  • Global context: Recession in major economies or geopolitical risks may prompt the Fed to take a softer approach.

3. How Does Monetary Policy Affect the Global Market?

Every adjustment in the Fed's interest rates has a ripple effect:

  • Bond yields: Low interest rates → falling bond yields → capital flows into risk assets like stocks, commodities, crypto.

  • International capital flows: Low interest rates in the US drive capital to seek higher yield markets.

  • Currency rates: A weak USD makes US exports cheaper, supporting trade but putting pressure on import inflation.

  • Commodity prices: A weak USD often drives up the prices of gold, oil, and base metals.

  • Stock market: Low borrowing costs support corporate profits and stock valuations.

  • Cryptocurrency market: Increased global liquidity often stimulates capital flows into Bitcoin, Ethereum, and altcoins.

4. Guiding the Forex Market in a Volatile Period

For forex traders and cryptocurrency investors, USD volatility carries strategic significance:

  • Monitoring interest rate differentials: The currency of a country with higher interest rates tends to be stronger.

  • Reading economic data: CPI, NFP, GDP, information from central banks are all catalysts.

  • Understanding correlations: Weak USD → EUR/USD rises, USD/JPY falls.

  • Trading based on risk appetite: A weak USD often coincides with 'risk-on' sentiment – investors seek risk assets.

  • Strict risk management: Stop-loss orders, reasonable allocation to avoid large fluctuations.

5. Global Economic Outlook

  • Global growth: The IMF and World Bank forecast a slowdown but not uniformly across regions.

  • Global inflation: Some economies still face high price pressures from energy and geopolitics.

  • Geopolitics: Tensions in Eastern Europe, the Middle East, and the US-China trade dispute affect sentiment and capital flows.

  • The role of China: The situation in consumption, real estate, and China's stimulus policy will significantly impact commodities and international trade.

  • The 'soft landing' scenario: If the US manages to control inflation without falling into recession, risk markets – including crypto – may benefit significantly.

6. Strategies for Investors

  • Continuous information updates: Economic data, Fed meetings, geopolitical information.

  • Diversifying the portfolio: Balancing between stocks, commodities, currencies, and crypto.

  • Taking advantage of a weak USD: Seeking opportunities in currencies, markets, and assets that benefit from capital shifts.

  • Proactively managing risk: Not going 'all-in' on a single scenario, always having backup plans.

Conclusion

The weakening of the USD and expectations that the Fed will cut interest rates in September are opening a new phase for the global market. With a lower interest rate environment and higher risk appetite, opportunities may open up for risk assets, especially cryptocurrencies. However, the market still harbors strong volatility due to geopolitical factors and economic uncertainties. Investors need to be flexible in seizing opportunities while remaining steadfast in risk management principles.