Fed rate cut ahead, 'dollar panic'…"Complete defeat to the euro"

Dollar value evaporated 10% this year… Aftermath of Trump's tariff bombshell

ECB keeps three key policy rates on hold…"Shows economic resilience"

The U.S. central bank (Fed) saw the dollar's value fall to its lowest level against the euro in four years ahead of its benchmark rate decision.

According to Bloomberg News, on the 16th (local time) in the foreign exchange market the euro rose 0.9% from the previous close to $1.1867 per euro. That is the highest level since September 2021.

The dollar index, which shows the value of the dollar against six major currencies including the euro, fell 0.69% from the previous trading day to 96.633. It fell intraday as low as 96.556, the lowest since July 1 (96.377).

The dollar's weakness is interpreted as reflecting expectations of a Fed rate cut. With the Federal Open Market Committee (FOMC) opening a two-day meeting, financial markets are treating a '0.25%-point cut' as a foregone conclusion.

According to the Chicago Mercantile Exchange (CME) FedWatch Tool, the federal funds rate futures market prices a 0.25%-point cut at 96% and a 0.5%-point cut at 4% for this meeting. The probability of no change is seen as 'zero' (0). Indicators showing a slowdown in labor demand have been released for four consecutive months, heightening expectations for a rate cut.

By contrast, the European Central Bank (ECB) held a monetary policy meeting on the 11th and left all three key policy rates—the main refinancing rate, the deposit rate, and the marginal lending rate—unchanged. ECB President Christine Lagarde said, "The domestic economy is showing resilience, the labor market is solid, and risks are more balanced."

Markets largely expect the ECB to keep rates on hold at next month's meeting and then cut by 0.25%-point at the last meeting of the year in December.

Karl Schamotta, Corpay's Chief Market Strategist, said, "Investors expect dovish signals from the voting record to be released on the 17th, the dot plot showing economic and rate projections, and Fed Chair Jerome Powell's press conference," adding, "These expectations are driving broad dollar weakness."

So far this year through this date, the dollar has fallen 10.9%. Most of the decline was concentrated in March–April. This reflects heightened concerns about stagflation (economic stagnation with rising prices) due to President Donald Trump's high-tariff policies.

Im Dayeon Reporter allopen@hankyung.com