Reflecting rate-cut expectations?…Dollar value at lowest in 4 years

Dollar Index lowest since July

ECB "holds rates"…Euro strengthens

Ahead of the US central bank (Fed)'s decision on the policy rate, the dollar's value against the euro fell to its lowest level in four years.

According to Bloomberg, on the 16th (local time) in the foreign exchange market the euro's value against the dollar rose 0.9% to $1.1867 per euro compared with the previous session. This is the highest since September 2021. The dollar index, which shows the dollar's value against six major currencies including the euro, fell 0.69% to 96.633 from the previous trading day. It dipped intraday to 96.556, showing the lowest level 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 its 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 futures market priced in a 96% probability of a 0.25% point cut at this meeting and a 4% probability of a 0.5% point cut. The chance of no change is seen as 'zero' (0). Indicators showing a slowdown in labor demand have been released for four consecutive months, increasing expectations of a rate cut.

Meanwhile, the European Central Bank (ECB) held a monetary policy meeting on the 11th and left its 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 unchanged at next month's meeting and then cut by 0.25% point at its final meeting of the year in December.

Karl Schamotta, Corpay's chief market strategist, explained, "Investors expect dovish signals from the voting records 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." Year to date through today, the dollar has fallen 10.9%. Most of the decline was concentrated in March–April. This was influenced by growing concerns about stagflation (economic stagnation with rising prices) due to U.S. President Donald Trump's high-tariff policy.

Reporter Da-yeon Im allopen@hankyung.com