Weekly forex insights: US Dollar on a steady decline

The U.S. dollar has been on a steady decline for the past three weeks, with the drop accelerating after the Federal Reserve’s notable interest rate cut on September 18. This weakening of the dollar is driven by rising market expectations of additional rate cuts and growing optimism about a “soft landing” for the U.S. economy. This shift in sentiment has boosted risk appetite in global markets, contributing to a partial recovery of the Indian rupee.

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The U.S. dollar has experienced a continuous decline over the past three weeks, a trend that intensified following the Federal Reserve’s significant interest rate cut on September 18. This decline in the dollar stems from growing market expectations of further rate cuts and an overall confidence in a “soft landing” for the U.S. economy. The shift in sentiment has led to increased risk appetite across global markets, fostering some recovery for the Indian rupee.

This week, the US$INR pair started at 83.89 but soon dropped to its lowest level in more than two months, closing at 83.4775. After an extended period of stability, the currency pair exhibited some volatility, with a range of 33 paisa during the week. The rupee’s notable rebound occurred during the last two trading sessions following the U.S. Federal Reserve’s monetary policy meeting. The Fed cut interest rates by 50 basis points and indicated the potential for further cuts. Projections suggest an additional 50 bps reduction by the end of 2024, a full percentage point by 2025, and another 50 bps by 2026.

As a result of the Fed’s dovish stance, the dollar index fell to a 1-year low of 100.215, a level last observed in July 2023. Fed Chair Jerome Powell emphasized that the central bank does not intend to return to the ultra-low interest rates of the past, indicating that rates would stabilize at a higher neutral level. Despite this, inflation targets remain at 2%, and interest rates are expected to settle around 2.75-3.00% by 2026. The weakening dollar, coupled with positive portfolio inflows and a 0.7% appreciation in the Chinese yuan, contributed to the rupee’s strength.

In addition, the Indian Sensex surged past the 84,000 mark for the first time, driven by robust foreign institutional investments following a global rally triggered by the Fed’s rate cut. September has seen significant foreign portfolio investments in Indian equities, with FPIs injecting ₹33,300 crore, the second-highest monthly inflow in 2024.

Looking ahead, economic indicators such as PMIs, housing data, and consumer confidence will be critical, alongside the PCE report on September 27. The dollar’s weakness is likely to continue, barring any sudden economic or geopolitical shifts that could reverse the current trend. Markets will closely monitor these developments to inform future strategies.