US currency strengthens against Euro and Yen in anticipation of American economic data release
The Federal Reserve (Fed) is gearing up for one or two interest rate cuts in the remainder of 2025, with a strong possibility of a cut as early as September. This shift in monetary policy, indicated by the Fed, has caused a notable weakening of the U.S. dollar (USD) against major currencies.
The Fed left the federal funds rate unchanged at 4.25%-4.50% in its last meeting, but notable dissent by two members voting for a 0.25 percentage point cut and the revised language suggesting moderated economic growth support the likelihood of rate reductions soon.
Meanwhile, the European Central Bank (ECB)'s stance remains less clear, but the euro's performance against the dollar suggests some market optimism. The euro has rebounded sharply against the dollar, recovering from six-week lows, buoyed by the diverging interest rate outlooks and positive geopolitical developments.
The USD weakened notably in response to market anticipation of Fed rate cuts, with the U.S. Dollar Index dropping by 1.2% following disappointing jobs data that intensified speculation of easing. The euro, British pound (GBP), and Japanese yen (JPY) have also been influenced by these dynamics, with forecasts suggesting moderate strengthening against the dollar through late 2025 and early 2026.
Investors are awaiting services data from the Institute for Supply Management (ISM) for potential support of the greenback. The Bank of England is expected to maintain its rate guidance at this week's policy meeting, while the European Central Bank is believed to have concluded its easing cycle.
The focus remains on tariff uncertainties, with the latest duties imposed on imports from scores of countries stoking worries about the health of the global economy. Switzerland is looking to make a "more attractive offer" in trade talks with Washington to avert a 39% U.S. import tariff on Swiss goods that threatens its export-driven economy.
Goldman Sachs expects the Federal Reserve to deliver three consecutive 25 basis-point rate cuts starting in September, with a possible 50 basis-point move if the next jobs report shows a further rise in unemployment. The 15% tariff that European Union goods face when entering the U.S. is all-inclusive, according to a senior EU official.
The U.S. jobs report is believed to have shifted the outlook for where the Fed Funds rate target will be one year from now. Money markets are pricing in a 92% chance of the Fed cutting rates in its next meeting in September. The firing of the head of the Bureau of Labor Statistics (BLS) and the resignation of Fed Governor Adriana Kugler could harden the views of the FOMC to protect its independence.
The dollar index, which measures the U.S. currency against six counterparts, was up 0.30% at 98.864, having touched a one-week low earlier in the session at 98.609. Sterling is currently up 0.05% at $1.3291 against the dollar, while the Japanese yen is down 0.34% at 147.6 per dollar.
Derek Halpenny, head of research global markets at MUFG, suggests that the pressure to hike rates could come from a wish to help support and stabilize the Japanese government bonds market. JGB market instability remains a downside risk for the yen, according to Derek Halpenny.
Economists raised their growth forecasts for the euro area and Japan following relatively benign trade agreements. The U.S. dollar edged up but remained near Friday's lows due to weak jobs data boosting bets on Federal Reserve rate cuts.
Thierry Wizman, global forex and rates strategist at Macquarie Group, suggested that the U.S. jobs report gave President Trump more justification to consider firing Jay Powell or appointing a more dovish Chair. The firing of the head of the Bureau of Labor Statistics (BLS) and the resignation of Fed Governor Adriana Kugler could harden the views of the FOMC to protect its independence.
In summary, anticipated Fed rate cuts in 2025 are causing broad dollar weakness, while the euro and other major currencies are gaining or expected to gain ground, driven by diverging central bank policies, inflation and growth prospects, and geopolitical developments. The ECB's stance appears less clear but the euro's performance suggests some market optimism relative to the U.S. dollar.
Global investors may find opportunity in the shifting finance landscape, as the anticipated interest rate cuts by the Federal Reserve could lead to a strengthening of global economy, especially for sectors that benefit from a weaker U.S. dollar. Meanwhile, the European Central Bank's less clear stance and the euro's rebound against the dollar indicate potential profit in the European market, providing spending power and encouraging investing in that region.
