Historically, the U.S. dollar has shown strength during several past rate cut cycles, including the periods of 1974-76, 1982-85, 1992-93, and 2008-09. During these times, even as the Federal Reserve lowered interest rates, the U.S. Dollar Index (DXY) remained strong or even increased. With the Federal Reserve entering a new rate cut cycle in September 2024, the dollar’s strength may persist over the coming months, potentially repeating the phenomenon of a strong dollar during a rate-cutting phase.

Strong Dollar Amid Rate Cuts

The U.S. Dollar Index (DXY), which measures the dollar’s strength against a basket of six major currencies, is heavily influenced by the euro, which carries a weight of 57.6%. The strength of the dollar is not solely dependent on U.S. economic performance but also on the relative performance of other currencies like the euro. Since the Fed began cutting rates in September, the DXY has remained above 102, signaling that the dollar remains strong.

Even though the U.S. is in a rate-cut cycle, other major economies, including the eurozone, are also implementing accommodative monetary policies due to weak economic growth. As a result, despite the Fed’s rate cuts, the dollar has not weakened quickly because other economies are not significantly outperforming the U.S. In the short term, there is a high likelihood that the dollar’s strength will continue.

U.S. and European Economic Conditions

In the U.S., the September nonfarm payroll data exceeded expectations, with 254,000 jobs added, and the unemployment rate fell to 4.1%. This has increased the probability of the Federal Reserve cutting interest rates by 25 basis points in November. Fed Chair Jerome Powell has hinted that the central bank could cut rates two more times this year, amounting to a total of 50 basis points. By the end of 2024, the federal funds rate could drop to a range of 4.25%-4.50%.

However, uncertainties remain in the U.S. economy. For example, a large-scale dockworkers' strike on the East Coast and Gulf Coast of the U.S. has disrupted logistics, potentially raising prices and adding inflationary pressures. Additionally, the ongoing escalation of tensions in the Middle East adds uncertainty to global oil prices, which could further complicate the U.S. economic outlook.

In the eurozone, inflation is no longer the primary concern. The European Central Bank (ECB) has estimated that the region's inflation rate for September was 1.8%, below the 2% target. However, the eurozone is struggling with weak economic growth, and the ECB is likely to prioritize economic recovery. The eurozone's GDP growth for Q2 2024 was only 0.5%, reflecting slow progress, and the ECB is likely to lean more heavily toward further rate cuts.

Monetary Policies in Other Major Economies

Besides the U.S. and the eurozone, Japan remains the only major economy facing pressure to raise interest rates. Japan’s new Prime Minister, Shigeru Ishiba, has prioritized combating inflation. Meanwhile, the Bank of England could also cut rates as inflation continues to ease, and economic growth slows in the U.K. The Bank of Canada has also adopted a more dovish stance, having cut rates three times by a total of 75 basis points since June 2024.

Countries like Sweden and Switzerland, which account for a smaller portion of the DXY, are also pursuing accommodative monetary policies. Sweden, for example, has seen inflation fall to 1.2% in August, and the Riksbank has cut rates three times this year. Switzerland, with low inflation at 1.1%, has similarly been cutting rates. These policies are contributing to the overall strength of the U.S. dollar.

Outlook

In summary, the strong dollar is likely to persist during the current rate cut cycle, especially as other major economies are also lowering interest rates. Over the next few months, the Federal Reserve's actions and the global economic outlook will be key factors shaping the dollar's trajectory. For forex market participants, the strong dollar will likely remain a dominant force, and close attention should be paid to further developments in U.S. monetary policy as well as changes in other central banks' policies.

Investors should also be mindful of potential risks in the global economy, such as the Middle East tensions impacting oil prices and the uncertainty surrounding global supply chains. These factors could have a significant influence on the dollar’s future performance.