Markets brace for rate cuts and political interference as investors pull back from US currency
Foreign exchange strategists expect the US dollar to weaken further, according to a Reuters survey conducted from August 1 to 5.
The outlook is driven by deepening concerns over Federal Reserve independence, political pressure on economic institutions, and the growing likelihood of multiple interest rate cuts by year-end.
A key trigger for investor unease was US President Donald Trump’s dismissal of Bureau of Labor Statistics (BLS) Commissioner Erika McEntarfer following downward revisions to prior months’ job data and a weaker-than-expected July employment report.
As reported by Reuters, this move reversed recent gains in the dollar that came after Trump’s tariff agreement with the European Union.
The greenback remains down nearly 9 percent year-to-date against a basket of major currencies.
According to CME’s FedWatch tool cited by Reuters, futures markets are now pricing in a 91 percent probability of a rate cut at the Federal Reserve’s next meeting, up sharply from 35 percent just one week earlier.
Expectations for total rate reductions have increased to 60 basis points by December and 130 basis points by October 2026.
As per the same survey, over 60 percent of strategists—26 of 42—anticipated that net-short dollar positions will rise or remain steady by October, though more than one-third of respondents now expect a decrease in those bets, up from 17 percent in July.
Jason Draho, head of asset allocation in the Americas at UBS Global Wealth Management, noted that while short-dollar remains a consensus long-term trade, “near-term views have become less bearish,” with positioning likely to shift toward fewer net shorts.
Analysts have cited Trump’s repeated public criticism of Fed Chair Jerome Powell and the sudden resignation of Fed Governor Adriana Kugler as signs of a politicised central bank.
According to ING FX strategist Francesco Pesole, “Should markets interpret Fed independence as having been materially compromised, that would be quite a compelling argument for a weaker dollar.”
Pesole added that markets may react negatively if Trump installs a nominee as governor who could later become chair.
Trump has stated he will soon name a short-term replacement for Kugler and a new BLS commissioner, and confirmed he is reviewing four candidates to succeed Powell when his term expires in May 2026.
US Treasury Secretary Scott Bessent has been ruled out, as he intends to remain in his current role.
Meanwhile, concerns about the credibility of US government statistics are growing.
In a separate Reuters poll, 89 out of 100 policy experts raised doubts about the accuracy of government-released data just days before McEntarfer was removed.
Erik Nelson, head of G10 FX strategy at Wells Fargo, said the narrative of US economic dominance is fading.
“There are underlying structural concerns—Fed independence, data quality, you name it,” he said, adding that the overall economic backdrop is heading in the wrong direction.
Strategists in the August 1–5 Reuters poll forecast the euro to rise about 2 percent to US$1.17 by the end of October, then to US$1.18 in six months, and further to US$1.20 within a year—the highest forecast median since October 2021.
While the greenback rebounded modestly on Tuesday, it remained close to recent lows.
Eugene Epstein, head of trading and structured products for North America at Moneycorp, said markets are now in “purgatory between now and the CPI print,” adding that the Fed “is not in a rush to cut and not really seeing any signs of inflation.”
Wall Street economists expect the US consumer price index for July to edge up to 0.3 percent month-on-month and 3.0 percent year-on-year, according to a Reuters poll.
Goldman Sachs, also cited by Reuters, forecasts three consecutive 25-basis point cuts starting in September, and sees the potential for a 50-basis point move if job market weakness persists.
According to Reuters, the Institute for Supply Management’s non-manufacturing PMI declined to 50.1 in July from 50.8 in June, missing expectations for a rise to 51.5. Employment indicators continued to soften while input costs rose at their fastest pace in nearly three years.
Currency movements on Tuesday reflected the uncertain backdrop.
The euro traded flat at US$1.1569, while the dollar index rose 0.2 percent to 98.81 after hitting a one-week low of 98.609.
The dollar also gained 0.4 percent against the yen, reaching 147.66, after minutes from a Bank of Japan meeting suggested members may revisit rate hikes if trade frictions ease.
Reuters also reported that recent tariffs imposed by Trump on imports from dozens of countries have increased global economic uncertainty.
A senior European Union official confirmed that EU goods are now subject to a 15 percent all-inclusive US import duty.
Switzerland, whose economy is heavily export-dependent, plans to present a revised trade offer to avoid a 39 percent tariff on its goods.
