Dollar Headed for Monthly Drop on Rate-Cut Expectations

The dollar's monthly drop is rapidly materialising, with analysts pointing to a near-2 percent slide against major currencies in August. Markets have priced in growing odds of a Federal Reserve interest rate cut in September, now standing at approximately 86 percent, up from 63 percent earlier this month. This shift reflects both economic signal changes and mounting political pressure on the central bank.

Governor Christopher Waller of the Federal Reserve has called for immediate rate relief from restrictive settings, which has emboldened expectations of easing. Meanwhile, President Trump’s intervention in Fed affairs seeking the dismissal of Governor Lisa Cook has rattled confidence in central bank independence, further contributing to the dollar’s monthly drop. Cook’s ongoing lawsuit to remain in position has only heightened policy uncertainty.

Despite stronger-than-expected Q2 GDP growth, markets have become increasingly sensitive to political instability. The resulting erosion of the dollar is particularly striking given how resilient the US economy has appeared. Investors are recalibrating risk and rotating into other currencies such as the euro, Australian dollar, and yuan, solidifying the dollar's monthly drop.

Short-term US Treasury yields have fallen, yet longer-term yields remain elevated due to inflation concerns. This yield curve inversion adds another layer to the narrative behind the dollar's monthly drop, as real yields compress and make longer-duration Treasury assets less attractive.

Of note, market participants now expect over 100 basis points of easing by mid-2026, a dramatic shift from earlier projections. The resulting pressure on the dollar aligns with the dollar's monthly drop, indicating the greenback may remain underperforming if Fed plans maintain their dovish tone.

Domestically, the outcome has wide-ranging implications. A weaker dollar can support export-led growth while increasing the cost of imported goods. Emerging markets may benefit from this situation; however, capital volatility could increase due to the dollar’s pivotal role in global finance.

Ultimately, the dollar's monthly drop signals sentiment that the Fed is tilting toward easing and that political uncertainty may force its hand. The sustained or temporary nature of this decline will depend on how economic data confirms or refutes those expectations in the upcoming weeks. For now, the dollar looks poised to end the month weaker, a shift few saw coming at its start.

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