Does the dollar have more leeway to weaken from here?

The big question that is currently facing the markets is how much the Fed intends to relax its monetary policy after reducing rates by 25 basis points this month?

In the end, all of this will sum up the question of returns. There is no doubt that the United States is still paying the best return in terms of performance, from a comparative point of view. However, for traders / investors, everything is about what will happen.

If the Fed wants a more aggressive easing, it is more than likely that US yields will fall much faster than its peers, given the room for maneuver it has to reduce rates. If you compare that to countries like Europe, Japan or even the UK, their respective central banks will not have as much ammunition to lower their rates and further squeeze yields.

Another point to consider is that, structurally, the dollar is also one of the most "overvalued" currencies from the point of view of PPP. I do not use it often as a gauge, but to a certain extent, it reveals the positioning of the traders / investors over a given period.

Given the "overvaluation" of the greenback, if the Fed were to further relax and substantially reduce US yields, traders / investors would be encouraged not only to look to other bond markets, but also to investors. those of the currency "undervalued", that is to say potentially the euro, the yen and the pound.

All these speeches are of course mere conjectures and the situation is constantly evolving, but this is a point to consider as a whole.

On the other hand, if the Fed only wants to "reduce the insurance rate" to save ammunition in case of worse economic downturn (there are good reasons to do so too), this will keep US yields underpinned over the next few years. some months.

In turn, this will also boost the dollar among other central banks that are seeking to relax further and you can get rid of the "overvalued" and "undervalued" material.

There is an argument for both sides of history and this is the key debate that the markets are trying to solve right now. We will have just over two weeks to learn more about the Fed's plans, but knowing the central bank well, the Fed will always try to let the markets see if and when they can.