Warning of a sharp decline! State Street Bank strategist Ferridge drops a bombshell: the US dollar may depreciate by 10% this year! Traders are holding their breath awaiting Wash's formal ascension.
Lee Ferridge, a strategist at State Street Corp., stated that once the next Federal Reserve chair takes office, the Fed's interest rate cuts may exceed market expectations, and the dollar could fall by 10% this year.
Traders currently expect the Fed to resume cutting rates around June and to implement at least two 0.25 percentage point cuts by the end of the year. However, Ferridge, speaking on the sidelines of the TradeTech FX conference in Miami, believes officials will have room for a third rate cut in 2026. This view is partly based on his belief that Powell’s successor will face pressure from Trump to lower borrowing costs.
"Three rate cuts are possible," Ferridge said. "Two is a reasonable baseline scenario, but we must acknowledge that Fed policy is entering a more uncertain period."
Ferridge pointed out another dynamic: deeper rate cuts would reduce the cost for foreign investors to hedge currency risks on their U.S. investments. As they increase their hedging activity, this will put pressure on the greenback (the Fed’s currency).
The Bloomberg Dollar Spot Index fell about 8% last year, marking its worst annual performance since 2017, and has declined approximately 1.7% so far this year.
Concerns over the economic impact of trade frictions, worries about the U.S. fiscal outlook, and Trump’s pressure on the Fed have all weighed on the dollar. Trump has nominated former Fed governor Kevin Warsh to succeed Powell, whose term ends in May. Ferridge believes that if Warsh’s nomination is approved, he may meet Trump’s demands.
Ferridge noted that due to strong U.S. economic data reducing market expectations for rate cuts, the dollar may rebound by 2% to 3% in the short term.
However, sentiment to sell the dollar is “just waiting for Warsh to take over the Fed.” Ferridge added that Warsh might then cut rates more persistently, narrowing the interest rate differential between the U.S. and other regions. “If that happens, we know there is room for hedging ratios to rise.”
According to data from State Street, the current hedging ratio is about 58%, compared to over 78% before the Fed began raising rates in 2022.
Editor/Stephen
