All signs indicate that the next few months will be difficult for investors in the dollar. Previously, the U.S. presidential election debate and a critical inflation data led the market to expect an intensification of volatility before the end of the year.

Forex managers are working to cope with a series of dazzling uncertainties that may further intensify exchange rate volatility. With the Fed expected to cut interest rates next week and the U.S. election approaching, an indicator measuring the three-month implied volatility of the dollar has reached its highest level since the regional banking crisis in early 2023.

Fund managers say the key is to determine the Fed's action trajectory, and they expect the Fed to be the main driver of the dollar. However, they also need to figure out whether the market has already digested the Fed's relatively loose policy compared to other major central banks, and how to position themselves before and after the November U.S. election. At the same time, fund managers must also deal with a series of escalating geopolitical tensions that could affect the market in unpredictable ways.

Derek Schug, Director of Portfolio Management at Kestra Investment Management, said, "It's difficult to predict short-term exchange rate trends. We are preparing for the extremely volatile trend of the dollar for the rest of the year."

After the end of the U.S. presidential election debate on Tuesday, the dollar edged lower, and traders further unwound bets related to the speculation that former President Trump would defeat Vice President Harris in November. Currently, the dollar has not recovered much ground from the plunge in August, which reduced its gains for the year by more than half. The market expects the Fed to cut rates by about 100 basis points overall before the end of the year, even after a surprise increase in core inflation in the U.S. in August, making speculative investors bearish on the dollar for more than a year.

Here are some comments from Wall Street fund managers on the expectations for the dollar in the next few months:

Kathleen Brooks, Research Director at XTB

According to the data, XTB is the most accurate forecaster in the second quarter for the exchange rates of major currencies.

Brooks said, "Without a doubt, the primary factor driving the strengthening of the US dollar will be the relative interest rate differentials. The future prospects for the US dollar for the remainder of this year may really depend on the next few weeks."

Brooks said that any reduction in the bet on interest rate cuts by the Federal Reserve could give the US dollar some breathing room. She added, "I don't think the election is a key factor in the foreign exchange market. We are on the edge of a currency policy change, which is much more important to the market than political factors."

Regarding US dollar trading, Brooks pointed out, "For the year-to-date, forex volatility has been lower than any other asset, but you can see the US dollar exchange rate gradually rebounding by 2.5%. So, which currency pairs is the US dollar rebounding against? The yen and the euro." However, she expects the euro to US dollar exchange rate to fluctuate between 1.11-1.08 in the next three to six months, currently at around 1.10.

Kristina Campmany, Senior Portfolio Manager of Invesco's global debt team

Campmany, who manages assets of $6 billion, said, "As the Federal Reserve is about to start an easing cycle, whether it's a mid-cycle adjustment or a more pronounced neutral easing, the US dollar may be in a more sustained period of weakness in the future."

Campmany believes that such adjustments could lead to a maximum devaluation of the US dollar by 5%, or a maximum devaluation of 10% if the Federal Reserve's accommodative policy remains at a neutral level.

Regarding US dollar trading, Campmany pointed out, "Over the past year, it has been possible to engage in arbitrage trades in a relatively efficient manner, and we believe this situation will continue as long as global economic activity remains strong." Arbitrage trading involves investors borrowing funds in places with lower interest rates and investing in places with higher interest rates.

Invesco is more inclined towards high-yield currencies such as the Mexican peso and the Brazilian real, while also noting the special pressures these currencies have recently faced. They prefer to finance these positions through the US dollar as the base currency, as well as the euro, the renminbi, and the Swiss franc.

Meera Chandan, Co-Head of JPMorgan's Global Currency Strategy

Data shows that JPMorgan ranked second quarter accurate forecaster for major currency exchange rates.

Chandan pointed out the future prospects for the US dollar: "At this crucial moment, the US dollar is dividing the currency market into two parts: low-yield and high-yield. When US interest rates rise, the worst-hit currencies—low-yield currencies—may receive the strongest support when interest rates fall.

Chandan stated that the performance of the US dollar will ultimately depend on the country's economic growth prospects. "This is without taking into account the impact of the US presidential election."

Regarding US dollar trading, Chandan believes: "We have a defensive call attitude towards the US dollar. We still expect the US dollar to strengthen, but this will be different from the strength we have seen in the past few years. Support for the US dollar may come from safe-haven trades, rather than outstanding US economic growth and high yields."

She said that in an economic recession, the US dollar to yen exchange rate may fall to below 135, or even below 130, while the current exchange rate for this currency pair is approximately 1 US dollar to 142 Japanese yen. However, she pointed out that the US dollar still has the potential to strengthen because all cyclical currencies are likely to weaken.

Jonathan Duensing, Head of the US Fixed Income Division at Amundi

Duensing leads a team managing approximately $50 billion in assets. Duensing said, "Considering the discount range of the front end of the U.S. Treasury yield curve, the weakening of the U.S. dollar to its current extent is understandable. But in our view, it seems a bit oversold in the short term."

Duensing said that if there is a risk of a recession in the United States, the U.S. dollar may rebound as investors move towards quality assets. However, if the Federal Reserve's policy easing exceeds the level reflected in the current market, the U.S. dollar may weaken.

Regarding U.S. dollar trading, Duensing pointed out, "If the Federal Reserve achieves a soft landing on inflation and they are able to keep the U.S. economy at a position that appears close to potential growth, then you may see the U.S. dollar appreciate or depreciate by 3% to 5% in the next year or so."

Leah Traub, a portfolio manager and head of the foreign exchange team at Lord Abbett

Managing approximately $12.7 billion in funds, Traub said, "When considering the year-end trend of the U.S. dollar, the most important priority is the Federal Reserve's interest rate cuts. Then comes the global economic growth outlook, and finally, the U.S. elections."

Traub pointed out that as the Federal Reserve lowers interest rates, the leading advantage of U.S. Treasury yields may narrow. She said that if the Federal Reserve cuts rates by 25 basis points in September, it may also cut rates by 25 basis points in November, which could put pressure on the U.S. dollar. However, this scenario has already been priced in.

She said, "In order for the U.S. dollar to remain weak, we need to see an acceleration in global economic growth, even if the U.S. economy slows down. When I look around the world, I'm not sure where I'm seeing this situation."

In terms of U.S. dollar trading, the company is not making major bets on foreign exchange, but is reflecting its view on the U.S. dollar against non-U.S. currencies through bond allocation. She said, "As signs of a slowdown in the U.S. economy appear and the Federal Reserve becomes more dovish, we have shifted more of our long-term exposure back to the U.S. while maintaining an excessive exposure to non-U.S. credit."

She said that the hedging costs for investors denominated in US dollars are still favorable. For example, buying bonds denominated in euros and hedging them back to US dollars through a three-month forward contract will increase the annualized spread by 1.6%.

Will the Federal Reserve cut interest rates as expected by the market in this meeting? What impact will it have on the stock market? Welcome mooer to make an appointment to watch the September FOMC interest rate meeting~

Editor/ping