(Bloomberg) -- The dollar plunged after Federal Reserve Chair Jerome Powell affirmed expectations that the central bank will cut interest rates next month, reducing the appeal of fixed-income assets in the US.
A Bloomberg gauge of the greenback fell 1% to its weakest mark since January and Treasury yields tumbled after Powell’s remarks at the Kansas City Fed’s annual conference in Jackson Hole, Wyoming. The dollar gauge sank for a fourth straight week, the longest such streak in more than a year.
“Powell made it clear that the focus of the Fed has shifted from inflation and into balancing its dual mandate,” said Jane Foley, head of foreign-exchange strategy at Rabobank in London. “The speech contained no push back to the possibility of a larger Fed cut in September.”
The greenback’s slide prompted a surge in major peers including the pound, yen and the Australian and New Zealand dollars. Sterling rose 0.9% to $1.3209, reaching its strongest mark since March 2022, while the yen gained 1.4%, touching a session high of 144.05 per dollar. The kiwi and Aussie each rallied more than 1% versus the greenback and Treasuries gained across the curve.
“The time has come for policy to adjust,” Powell said. “The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks.”
The Bloomberg Dollar Spot Index has fallen some 2.4% in August, on pace for its worst monthly performance this year, amid a broader rally in Treasuries and solidifying bets that the Fed will lower borrowing costs next month.
Traders have consequently become less bullish on the world’s primary reserve currency, and now hold the fewest long positions in the derivatives market since March. Hedge funds, asset managers and other speculative traders together are carrying some $3 billion in bets tied to a rise in the greenback, down about 90% from a near-term peak earlier this year, according to the latest Commodity Futures Trading Commission data for the week through Tuesday.
The dollar’s drop on Friday is the biggest since November, when a soft inflation reading sent Treasury yields sliding and led traders to pile into bets that the Fed was done raising borrowing costs.
Swaps traders are now pricing in at least a quarter-point cut from the Fed at its September meeting. They expect approximately 100 basis points of total easing this year, slightly more than before Powell’s comments.
“This momentum of the dollar selling is likely to continue,” said Yusuke Miyairi, a currency strategist at Nomura International Plc. “We don’t have much data next week to gauge the US economic activity and inflation development until the US non-farm payrolls,” referring to one portion of the monthly jobs report due in early September.
--With assistance from George Lei.
(Adds latest CFTC data.)
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