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The Federal Reserve (the central bank of the U.S.) has announced a significant interest rate cut, reducing rates by 0.5 percentage points (half a percent). This brings the new short-term interest rates down to between 4.75% and 5%. It's the first major rate cut since the start of the COVID-19 pandemic in early 2020.

This cut is meant to help support the economy by making borrowing cheaper, which can lower costs for things like mortgages. People were expecting a smaller cut, but the larger reduction reflects the Fed’s commitment to keeping the economy on track without falling behind on issues like inflation or the job market.

In simple terms, the lower interest rates mean it should be cheaper for people to borrow money, whether it’s for homes or businesses, helping boost economic activity.

So what does this mean for the USD?
- Increase in volatility, in search for a direction
- Lower yield differential between USD and other currencies, which might lead to outflow and hence a weaker USD

Since prices are based on expectations, the question of "Will USD strengthen or weaken?" is equivalent to "Will investors price in larger and steeper rate cuts because of this significant 0.5% cut instead of a 0.25% cut?".

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