ISLAMABAD: The U.S. dollar hit a three-and-a-half-year low against the euro on Friday as financial markets reacted sharply to growing expectations of early and more aggressive interest rate cuts by the U.S. Federal Reserve.
Traders and analysts are pricing in a shift in monetary policy following a series of disappointing economic indicators that signal the U.S. economy may be slowing down faster than anticipated.
The EUR/USD pair surged past the 1.20 mark for the first time since late 2021, representing a significant depreciation of the dollar in global currency markets.
Analysts say the trend could continue if the Fed confirms dovish policy adjustments in its upcoming meeting.
Market Bets on Fed to Act Sooner Than Expected
Recent data, including weaker job growth, declining consumer confidence, and stagnating industrial production, have all contributed to renewed bets that the Fed may initiate rate cuts as early as the next quarter.
“With inflation moderating and GDP growth tapering off, the case for policy easing is growing stronger,” said James Lott, a senior forex strategist at a global investment bank.
Fed Chair Jerome Powell has previously maintained a cautious stance, emphasizing data dependency, but bond markets are now forecasting at least two rate cuts before the end of 2025.
Yields on U.S. Treasury bonds also declined this week, reflecting investor expectations of lower interest rates.
Euro Gains Strength as Confidence in Eurozone Stabilizes
Meanwhile, the euro has been supported by improving economic data from the Eurozone and a more stable inflation outlook.
European Central Bank (ECB) officials have also signaled a pause in rate hikes, but with less urgency to cut compared to the Fed.
A stronger euro has implications for international trade and commodity pricing, particularly for emerging markets that rely on dollar-based trade settlements.
The shift in currency dynamics may also boost European exports and put pressure on U.S. exporters, further complicating America’s trade balance.
