Why ‘King Dollar’ could scoff at Fed rate cuts

The upside-down nature of the global economy may reach new extremes if and when expected Federal Reserve rate cuts fail to weaken the US dollar.

Granted, the reasons why the international reserve currency should be plunging are as numerous as they are obvious.

They include: the US national debt topping US$35 trillion; slowing economic growth; the Fed about to unwind its 2022-2023 tightening cycle; intense political polarization imperiling Washington’s credit rating; and efforts to reduce the dollar’s omnipotence are gaining traction.

All eyes are on the actions by – and signals from – Fed Chairman Jerome Powell’s team, which is widely expected to begin slashing rates at this week’s September 17-18 policy meeting.

Yet even though “King Dollar” is losing some luster, it remains stubbornly firm. One big reason: the global context.

“Explaining dollar performance using a single variable — the direction of Fed policy in this case — is not usually very successful,” argues Isabella Rosenberg, a currency analyst at Goldman Sachs. “Clearly, the relative backdrop for FX matters much more.”

That backdrop has many other major central banks around the globe easing, too, allowing the dollar to maintain its attractiveness vis-a-vis peers. They include the European Central Bank, the Bank of England, People’s Bank of China and likely the Bank of Korea in the weeks ahead.

Rosenberg notes that “if most central banks are easing together, we can expect that to limit the degree to which Fed easing will weigh on the dollar. While the market is pricing a faster Fed pivot, we still think other central banks would ease policy more if the Fed gave them the space to do so.”

It’s not clear, though, that continued dollar strength is great news for the