State Street warns dollar could slide up to 10% as Fed rate cuts risk rise

Strategists at State Street Corp. say the dollar could slide as much as 10% this year if the Federal Reserve cuts interest rates more sharply than expected. 

The caution comes as investors remain vigilant for potential shifts in policy and the Fed’s leadership. Easing monetary policy, the firm’s researchers said, will likely weaken the dollar by dampening its appeal to international investors and further pressuring the currency. 

State Street, one of the world’s largest asset managers, reports that the US dollar is already in its weakest stretch in almost a decade. Strategist Lee Ferridge articulated this outlook at a conference in Miami, where he explained that further declines could happen if financial conditions become more relaxed. 

Ferridge said that the firm’s main outlook for the year was that the Federal Reserve would cut interest rates twice. However, he added that there was a real possibility of additional cuts beyond that. He explained that two cuts were a reasonable base case, but noted that three cuts could also happen depending on how the economy develops.

When US rates are high, global investors hold dollar-based assets because they provide superior returns. But when rates drop, returns become less attractive, and investors run from it, pulling out of the sector and moving elsewhere.

When the interest rates go down, borrowing becomes an affordable option for many. As a result, spending habits and investment patterns rise. And while this might boost economic growth, it can dampen the dollar’s strength and demand, particularly from foreign investors seeking better returns elsewhere.

Possible Fed leadership shift raises rate cut expectations

Another factor that could affect the dollar’s strength is a potential leadership shake-up at the Fed. President Donald Trump has nominated Kevin Warsh to replace Jerome Powell. If he is appointed, Warsh is widely accepted as someone who can also support faster and deeper rate cuts. 

A leadership shift like that might signal that the country would be aggressively easing its monetary policy stance. Such a shift in mindset would raise expectations of lower rates and could further weaken the dollar. 

Currently, the Fed’s target interest rate is between 3.50% and 3.75%. Financial markets are now anticipating a cautious approach as well, with two cuts expected this year. 

According to data from CME Group’s FedWatch Tool, investors are betting the first cut will occur in June, notwithstanding two policy meetings to come before. If the Fed eventually cuts rates more than previously expected, the dollar could face even more downward pressure. 

Investors react rapidly to changes in interest rate expectations, and even indicators of future rate cuts can have a significant impact on the exchange rate market.

Dollar weakness could reshape demand for Bitcoin and other assets

A weaker US dollar often boosts riskier assets, such as Bitcoin. Historically, BTC prices tend to move inversely to the dollar index, meaning that when the dollar drops, Bitcoin and other alternative investments can become more attractive to investors.

Dollar weakness has played the same role as good performance in crypto markets. Some investors see Bitcoin as a hedge against the risks of fiat currencies, particularly during periods of loose monetary policy. This relationship, however, is not always the case. 

There have certainly been periods when Bitcoin has fallen as the dollar weakened. Other factors, such as investor mood, profit-taking, and general economic uncertainty, can also affect crypto prices. 

For now, State Street’s warning reflects the extent to which the dollar is sensitive to policy choices and investor expectations.