Investors brace for Fed’s imminent rate cut while analyzing the potential impact on economic growth and stability
The U.S. dollar plunged sharply on Wednesday, reaching a four-year low against the euro as market expectations for an imminent interest rate cut by the Federal Reserve intensified. The euro surged 0.8 percent to $1.18783, a level not seen since September 2021, and is currently trading at $1.1853. The dollar index, which measures the greenback against six major currencies, dropped 0.6 percent to 96.787, its lowest since early July 2025.
Investors have priced in a 25-basis-point cut in the Fed’s benchmark interest rate at the Federal Open Market Committee (FOMC) meeting scheduled for Wednesday, underscoring the growing consensus that monetary easing will start after months of stabilization in the dollar’s value following a significant decline earlier this year.
Market expectations and Fed outlook
The downward pressure on the dollar reflects anticipation of a shift in U.S. monetary policy. After a period of robust rate hikes intended to tame inflation, weakening U.S. labor market data in recent weeks has fueled expectations that the Fed will pivot to rate cuts to support economic growth. This dovish outlook has intensified as labor market indicators showed sharper declines than expected, signaling a possible cooling of economic activity.
Further stirring the market sentiment were comments from U.S. President Donald Trump, who renewed calls for aggressive monetary easing, adding political pressure on the Fed to reduce borrowing costs sooner rather than later. Market participants eagerly await the Fed’s official statement, the voting record, and the updated “dot plot” forecasts that indicate individual committee members’ interest rate projections. Fed Chair Jerome Powell will hold a post-announcement press conference to clarify the policy stance, which investors regard as key guidance for the coming quarters.
Broader currency market movements
The euro’s rise to a four-year high against the dollar is also buoyed by stronger-than-expected Eurozone economic data. Industrial production in the euro area showed modest growth in July, suggesting resilience amid ongoing trade tensions and geopolitical risks. German investor sentiment improved unexpectedly in September, reinforcing confidence in the European economy and the European Central Bank’s (ECB) potential resistance to rate cuts, in contrast to the Fed’s easing trajectory.
Other currencies mirrored the dollar’s slide. The British pound strengthened 0.4 percent to $1.36530, hitting a two-month high. Slower job market growth in the U.K. has lowered inflation expectations, increasing speculation that the Bank of England may ease its policy stance. Meanwhile, the dollar lost ground against the Japanese yen ahead of the Bank of Japan’s policy meeting, where rates are expected to remain unchanged at 0.5 percent. Japan’s political landscape is also in flux, with several candidates vying to succeed the outgoing prime minister, adding uncertainty to Japan’s economic outlook.
The dollar in international finance
The U.S. dollar’s role as the predominant global currency remains significant despite its recent weakness. It continues to serve as the primary funding currency in international markets, widely used in cross-border loans, trade settlements, and as a reserve currency. The recent slide in the dollar’s value does not diminish its centrality in the global financial system, where instruments like foreign exchange swaps and forwards facilitate trade financing and risk hedging in the dollar.
However, periods of dollar weakness can impact global markets and financial stability by altering currency valuations and capital flows. Emerging markets often see ripple effects in their currencies and debt-servicing costs when the dollar moves sharply. As such, investors watch Fed policy closely for cues about the dollar’s trajectory and potential risks to international markets.
Impact on U.S. and global markets
The dollar’s decline generally benefits U.S. exporters by making American goods cheaper in foreign markets, potentially boosting corporate earnings and supporting equity markets. However, it can also increase inflationary pressures on imported goods, complicating the Fed’s policy decisions.
On Tuesday, alongside the currency moves, U.S. stock markets showed mixed reactions, balancing optimism about cheaper borrowing costs with concerns over economic slowdown. Technology stocks rallied modestly, benefiting from hopes for easier lending conditions, while industrial shares remained cautious amid signs of slower manufacturing activity.
Commodity markets also responded to the dollar’s decline. Gold prices typically gain when the dollar weakens as a weaker greenback makes gold cheaper for holders of other currencies. Oil prices saw some upward pressure, reflecting a mix of supply concerns and softer dollar-driven demand prospects.
What to watch going forward
The FOMC meeting on Wednesday is pivotal. Investors expect the Fed to cut rates by 25 basis points; however, attention will focus on the accompanying statements and Powell’s comments regarding the pace of future cuts. Markets will try to gauge if the Fed signals a measured approach or a more aggressive easing cycle to counteract the slowing economy.
Global economic factors, including Eurozone resilience and geopolitical developments, will continue influencing the dollar’s path. Additionally, the evolving labor market data in the U.S. and inflation trends will shape the Fed’s strategy.
Economic analysts advise close monitoring of currency markets and interest rate sensitive sectors in equities and fixed income for signs of adjustment to the new monetary policy expectations. The unfolding Fed stance will be critical for setting the tone for the remainder of 2025 and beyond.