The ’s decline looks less like a rout and more like a steady, measured leak — a benign bleed that keeps trickling as the Fed takes its knife to policy. Since the weak July jobs report cracked the veneer of labour strength, the greenback has shed about 2.5%, and with the delivery of now imminent, three-month USD hedging costs are set to fall further.
That’s the oxygen foreign asset managers needed to top up their hedge ratios on U.S. holdings, and the flows are already tilting the board.
has the wind at its back. The glide path points toward 1.21 by year-end, with 1.23 in sight further out. Seasonality alone becomes a headwind for the dollar from October onward, but the looming speculation over who populates next year’s FOMC only adds to the drag.
For the higher-beta camp, a Fed easing cycle (150 bp) without recession should be rocket fuel. Commodity currencies tend to thrive in that environment, and the Australian dollar stands out as the cleanest expression — doubly so if Chinese consumption flickers back to life.
Lagging, though, may be . Political fog in Tokyo ahead of the LDP leadership change is muddying the outlook, and while the Bank of Japan still looks on course for an October hike, any pivot back toward Abe-style easy money from the new government would pull the rug on that call. For now, 142 by year-end remains the base case, but the yen’s path is cluttered with more political risk than rate certainty.
The Fed is about to step back into the arena, not with the thunderclap of emergency cuts but with the slow grind of policy realignment. What looked like a fortress of “slightly restrictive” stability through most of 2025 has started to reveal its cracks. The jobs market, once the proud bulwark, is now buckling at the edges.
Consumer demand—long the engine of this expansion—has shifted from a steady hum to a faint cough. , while still uncomfortably above target, is no longer the raging bonfire it once was. This is why Powell and his lieutenants are preparing to walk the wire: a September 25bp cut is less about throwing fuel on the fire and more about making sure the embers don’t turn cold before the Fed can guide the economy across the chasm.
On the surface, is holding up, but the headline masks the story. The U.S. looks like a marathon runner clocking a faster split thanks to a tailwind—net trade—while the legs (household spending) are starting to wobble. The Beige Book reads like a ledger of stagnation: eleven out of twelve districts with flat or declining spending, virtually no hiring, and consumer wallets snapping shut.
The August print at a paltry 22,000 jobs was a warning shot, but the revision bombs dropped this week told the real story: the job creation the Fed thought it had was barely half the original tally. That’s not a softening; that’s a hard fade.
The inflation monster that once stalked every Fed meeting is more apparition than beast now. Tariffs keep the optics messy, but the three original drivers of 2022’s 9% spike—oil’s surge, rental explosions, and wage breakouts—are no longer in play. , in fact, remains capped by excess supply and nagging demand worries, a market that feels more like it’s drowning in barrels than starving for them. Rents have cooled, wage growth has lost its bite, and disinflationary gravity is back. The Fed knows it.
Markets need to see the coming cuts not as a panic move but as the Fed chiselling away at an over-tight monetary stance. Powell’s playbook is not to slam the pedal but to edge the car out of low gear. A September 25bp cut, likely followed by similar trims in October and December, sets a path to 3% by early 2026.
Some voices on the committee want to go bigger—50bp out of the gate, catching up to the deteriorating jobs data—but the center of gravity is toward caution. Think of it as the Fed picking its way across a rocky river, one careful stone at a time.
At the front end, the has already built a moat around 3.5%. Traders are braced for at least 100bp of easing, with a premium layered on top for uncertainty. The only way the market gets more juice is if the Fed cuts to below 3%. Out of the curve, the has been hovering above 4% but could easily drift toward 3.5% if the rate-cut fever catches on.
That would be an overshoot—if tariffs keep inflation sticky around 3.%. Expect chop, not collapse, as the back end struggles to find its equilibrium.
The Fed is not orchestrating a grand rescue; it is guiding a slow retreat from an overly restrictive perch. Every step is about timing—how to loosen enough to support a faltering labour market without letting tariffs reignite inflation. Think of Powell less as a firefighter dousing flames and more as a tightrope walker, balancing between the risk of collapse and the need to move forward.
By early 2026, the destination is clear: fund rates near 3%, the labour market weaker but intact, inflation drifting down. For traders, the game is in the curve whipsaws, in the dollar’s drift, in the equity market’s front-running. The playbook is not about chasing an emergency pivot, but about trading the glide path of a Fed trying to land an over-extended plane without snapping the landing gear.