"Despite the Federal Reserve's unexpected 50 basis point rate cut last week, we believe the core forex dynamics for G10 currencies remain unchanged, and the EUR/USD will continue to rise," Bank of America Securities analysts said in a report on September 26.
The bank believes the dollar is currently overvalued, but the Fed's rate cut cycle could further alleviate this overvaluation in the mid-term, including our expectations for a rise in EUR/USD.
"We expect EUR/USD to continue its recent uptrend, maintaining an unchanged year-end 2024 target of 1.12 and a year-end 2025 target of 1.17," Bank of America stated.
Bank of America noted that the dollar's decline is more likely to persist as slowing inflation and a weak labor market support the Fed in cutting rates at a slightly faster pace.
Bank of America expects another 50 basis point cut at the November meeting, followed by a further 25 basis point cut in December.
As of 10:00 AM Eastern Time (14:00 GMT), EUR/USD was up 0.1% to 1.1142, with a year-to-date increase of about 1%.
Why is the Dollar Weakening?
The dollar's value is strongly influenced by the interest rates set by the Federal Reserve. When the Fed cuts rates, the yield on dollar-denominated assets becomes less attractive to investors. This decrease in demand typically leads to a depreciation of the dollar.
Bank of America analysts emphasized that the Fed's decision to cut rates is mainly in response to slowing economic activity and lower inflation, resulting in a more accommodative monetary policy stance. While these rate cuts benefit domestic economic growth, they make the dollar less competitive in the international markets.
Impact on Global Currencies:
A weaker dollar could provide favorable conditions for emerging markets and major currencies such as the euro and yen. As the Federal Reserve cuts rates, other central banks may adjust their policies, creating a more favorable exchange rate environment for non-dollar currencies. For forex investors looking to trade on the dollar's relative weakness, this shift could present opportunities.
Bank of America's Long-Term Outlook:
Bank of America Securities expects the dollar's downward trend to continue as the rate-cutting cycle persists. This trend could lead to volatility in the forex market, especially as traders anticipate further rate cuts and their impact on the dollar's trajectory.
In summary, the Federal Reserve's rate cuts could reshape the global currency landscape, signaling a period of weaker dollar performance and potential gains for other currencies. Investors and traders should closely monitor the Fed's actions and market sentiment to navigate these changes.
