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In the third quarter 2024 there was a dramatic change in interest rate expectations in the US after the Federal Reserve cut interest rates by 0.5%. Suddenly the market was expecting a further 1% cut in interest rates by the end of the year. This pushed bond yields down (prices up) and equity markets up. However, there were casualties. As you can see in the chart below, the US dollar lost almost 6% against the euro in the space of six weeks.
Since the end of September, we have seen trends reverse. As we pointed out in a recent edition of Chart of the Week, interest rate expectations in the US have corrected and look more reasonable to us now. This has led to weakness in equity and fixed income markets but has strengthened the US dollar. We can see in the chart that it has now recouped nearly all of its losses from the third quarter.
The uncertainty generated by this week’s US election was also weighing on the currency, but this is now resolved with an ‘America first’ President in the White House. This, along with a US economy performing better than the rest of the world and interest rates cuts unlikely to be any greater than the rest of the world, means we are likely to see this recovery continue to the end of the year.
