Dollar slides as September Fed cut nearly a done deal

Investors nearly fully convinced about a September Fed rate cut

The US dollar slipped against most of its major counterparts yesterday, staying on the back foot or stabilizing somewhat today.

The greenback seems to be struggling to stage a recovery as investors added again to their rate cut bets after New York Fed President John Williams said that it is likely that interest rates could fall at some point, though he added that they should closely monitor incoming data before they take any decision. "Every meeting is, from my perspective, live," Williams also said.

This, combined with US President Trump’s efforts to exert more influence on how monetary policy is conducted, led investors to price in a nearly 90% probability of a quarter-point rate reduction at the September 16-17 meeting, while the total number of basis points worth of rate cuts by the end of the year remained at 55.

Trump’s attempts to influence Fed policy also weigh

Trump’s push to replace Committee members with more dovish candidates is also impacting investor decisions, pulling short-term yields lower, although firing Governor Lisa Cook may not be an easy case as she sued to keep her job, which could thereby spark a protracted legal battle.

However, in March, the Board of Governors will reappoint the 12 regional reserve bank presidents, and if he manages to replace enough Governors by then, this could lead to the selection of dovish presidents as well and thereby larger rate cuts throughout 2026. This implies a huge downside risk for the US dollar and Treasury yields moving ahead.

For now though, investors may decide to pay attention to economic data, like today’s second estimate of US GDP and Friday’s PCE figures, which are the Fed’s favourite inflation metrics. Next week’s nonfarm payrolls may be even more crucial, given the emphasis Fed Chair Powell placed on the labor market when speaking at the Jackson Hole economic symposium.

Is the risk of sell America rising?

The big question is how this dovish shift within the Fed will impact the stock market. Under normal circumstances, expectations of lower interest rates are positive for stocks, especially for those of high-growth firms, which are valued by discounting projected free cash flows.

However, this time, a potential dovish shift will come at a big cost, the cost of the Fed’s independence and credibility. Something like that could result in investors losing their trust in US assets and thus, besides the US dollar, Treasuries and stocks could also suffer.

S&P 500 at record high, Nvidia’s earnings are good but not outstanding

Yesterday, all three of Wall Street’s main indices closed slightly positive, with the S&P 500 clocking a fresh record high. However, stock futures are pointing to a more subdued activity today. The big event came after the closing bell: Nvidia’s earnings release.

The company still expects permission from the US administration to start selling chips to China. However, with no rules in place yet, and concerns about whether Chinese regulators will discourage purchases of Nvidia chips, the tech giant excluded potential China sales from the forecast for the current quarter.

Although the results were still above analysts’ estimates, they were far from the blowout numbers market participants seem to have been accustomed to. This sent the stock around 3% down in after-hours trading and suggests a lower open on Wall Street today.

With the core CPI rate for July rising, the risk of the core PCE index, due out tomorrow, seems to be to the upside. Following the acceleration in the PPIs, more signs of sticky inflation could prompt investors to start betting on a slower rate-cut path by the Fed, which could result in a corrective pullback in equities.