The US dollar ended August on track for its steepest monthly drop in over a year, losing about 2% against major currencies. Investors are increasingly betting on the Federal Reserve cutting rates in September, with markets pricing an 86% chance of a 25-basis-point reduction. This shift follows weaker economic data and dovish signals from Fed officials, which have undermined dollar strength.
Federal Reserve Governor Christopher Waller has been a prominent voice urging rate cuts, citing softer labor market conditions. Waller supports a 25-basis-point reduction next month and anticipates further easing over the coming months. His remarks, coupled with Fed Chair Powell’s recent focus on employment risks, have accelerated expectations of policy loosening and contributed to a significant dollar selloff.
Dollar weakness has given gold a strong boost, with prices reaching their highest level since late July. Gold benefits in low-rate environments as its opportunity cost decreases, making it attractive amid expectations of easier monetary policy. Other precious metals also experienced gains before profit-taking tempered the rally, highlighting broad commodity strength supported by the softer greenback.
Political tensions add complexity, with President Trump’s attempt to dismiss Fed Governor Lisa Cook sparking fears about central bank independence. This uncertainty fuels volatility in currency markets, alongside anticipation for key inflation data. The combination of dovish Fed rhetoric, weak data, and political risks sets a challenging scene for the dollar, potentially sustaining its recent decline into September.
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