The U.S. central bank is likely to lower interest rates one more time before the end of the year. But is it a certainty? Not quite.
Rate cuts have a direct impact on the value of the U.S. dollar. The dollar is sensitive to rate reductions because lower rates diminish its yield potential. As rates decline, the dollar's return on investment weakens. Reflecting this, the U.S. Dollar Index was recently trading around 107 against a basket of six major currencies.
Expect increased market volatility on Tuesday as investors brace for the release of the Federal Reserve’s minutes from its latest meeting three weeks ago. At that meeting, policymakers cut interest rates by 25 basis points and signaled the possibility of another cut before year-end. Traders will closely analyze the minutes for further clues about the Fed’s rate-cut timeline.
Meanwhile, President-elect Donald Trump has vowed to impose substantial tariffs on major foreign economies as soon as he takes office. His initial targets include China, Canada, and Mexico. Tariffs of 25% will be levied on all imports from Canada and Mexico, while China — viewed as the U.S.'s top rival — will face an additional 10% surcharge on all goods and services.
Trump’s anticipated tariffs are already causing ripples in forex markets, with the dollar surging against rival currencies. The euro, in particular, has suffered due to concerns about the impact of U.S. tariffs on European Union exports, a move that could stall EU growth and force the European Central Bank (ECB) to implement further interest rate cuts.
The EUR/USD pair dropped to its lowest level in two years on Friday, with the euro-dollar exchange rate falling to $1.0330 before recovering to open Monday trading at $1.0460. The euro has lost approximately 7% against the dollar since its peak in September 2024.
Economic growth in Europe is already fragile, and a trade war would only exacerbate the challenges facing the region. The eurozone’s PMI data, unlike the U.S., showed a decline in business activity. To reignite its sluggish economy, the ECB may have no choice but to continue cutting rates, even if it brings additional pressure on the euro.
The global narrative seems to be shifting toward an America-first approach as the defining theme of 2025. U.S. economic dominance could be reaching new heights, adding another chapter to the story of U.S. exceptionalism.
