US Dollar Index drops below 97.80 due to lower demand for safe assets and Federal Reserve easing

    by VT Markets
    /
    Jun 24, 2025

    Fed Signals Rate Cut

    Recent comments from Federal Reserve officials suggest a possible rate cut in July or September. Fed Vice Chair Michelle Bowman mentioned that the impact of tariffs on inflation might be less significant than expected, which could help improve the job market. Fed Chairman Jerome Powell will soon address Congress, where he will outline plans amid slowing growth and rising prices. Many are looking for hints about a rate cut, as the Fed aims to adjust interest rates to keep prices stable and support employment. Quantitative Easing (QE) has been used in crises to increase cash flow in the economy, but it often weakens the US Dollar. On the other hand, Quantitative Tightening (QT) strengthens the US Dollar by stopping new bond purchases. Recently, the US Dollar faced fluctuations due to falling demand for safe-haven assets, especially as tensions between Israel and Iran have eased. The markets reacted quickly after Trump announced a ceasefire, and the Dollar Index (DXY) fell nearly 1.5% from its peak on Monday, approaching its lowest point since 2021. In Europe, the easing of tensions helped support stock markets, and this optimism extended to energy markets as well. Oil prices saw a slight rebound due to the lowered risk of regional disruptions, although Iran’s rejection of Israel’s claims suggests the calm may not last. Importantly, Israel has not yet taken any significant actions to follow up its statements, which keeps investors cautiously optimistic.

    Global Market Sentiment

    At the US Federal Reserve, public comments supported an already weakened Dollar. Bowman’s statement implies that tariffs may not affect inflation as much, which opens the door for policy adjustments. If the job market remains strong, we could see a rate cut as early as July, although the market is currently leaning towards a September cut if the data supports it. Powell’s upcoming appearance before Congress is eagerly anticipated, with many curious about the Fed’s readiness to change strategies. As inflation remains high and borrowing costs are substantial, there will be close scrutiny of how the Fed plans to balance growth risks with economic pressures. His testimony is likely to greatly influence expectations regarding interest rates, as the Fed aims to fulfill its dual mandate. We also need to consider previous liquidity strategies. In past downturns, Quantitative Easing generally weakened the Dollar, as more US dollars in circulation typically decreased its value. Conversely, when the Fed reduces support through Quantitative Tightening, the supply contracts—strengthening the Dollar. Given the fluctuating global risk sentiment and a dovish policy direction from the Fed, we are now considering strategies that balance the trend of a weakening currency with potential market volatility around interest rate predictions. How Powell discusses the next steps in policy and the emphasis on slowing growth will be crucial for shaping our investment positions. Short-term rate futures may respond quickly, especially around key data releases or news events. What matters now is not just whether easing will start, but how markets interpret future guidance. For the time being, using options that provide flexibility and reduce downside risk could be wise, especially in sectors or instruments closely linked to currency changes or treasury yields. Create your live VT Markets account and start trading now.

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