Dowoo Bank strategist warns that the US dollar may fall by 10% this year, and uncertainty in monetary policy is increasing.

Lee Ferridge, strategist at the American asset management giant Deutsche Bank, stated that with the Federal Reserve possibly cutting rates more significantly than the market expects in the future, there is a 10% risk of the US dollar falling this year, especially after the next Federal Reserve chair takes office, increasing uncertainty in monetary policy. The market currently widely expects the Federal Reserve to resume rate cuts around June this year and implement at least two rate cuts of 25 basis points each before the end of the year. However, Ferridge believes that policymakers may still cut rates for a third time in 2026. This judgment is partly based on the view that the successor to current chair Powell may face increased pressure from President Trump to lower borrowing costs. During an interview at the TradeTech FX conference in Miami, Ferridge said, "Three rate cuts are possible, two is the more reasonable baseline scenario, but we must accept that Federal Reserve policy is entering a more uncertain stage." He also pointed out that deeper rate cuts will reduce the cost for foreign investors to hedge against their US assets' exchange rates. As foreign investors increase their hedging activities, this behavior itself will put pressure on the dollar, further dragging down the dollar's performance. Data shows that the dollar index has fallen by about 1.7% so far this year, following a nearly 8% decline last year, marking its worst annual performance since 2017. Concerns about the impact of trade tensions on economic growth, uncertainty about the US fiscal outlook, and ongoing pressure from Trump on the Federal Reserve all negatively affect the dollar. Trump has nominated former Federal Reserve Board member Kevin Warsh to replace Powell, whose term will end in May. Ferridge believes that if Warsh is confirmed, he may implement a looser monetary policy to some extent as Trump desires. However, Ferridge also stated that in the short term, if US economic data remains strong and expectations for rate cuts cool down, the dollar could still experience a temporary rebound of 2% to 3%. But looking at the longer term, Ferridge pointed out that "once Kevin Warsh formally takes over the Fed and begins to consistently cut rates and narrow the interest differentials with other global economies, the dollar sell-off might really begin." He added that in such a scenario, there is still significant room for an increase in foreign investors' hedging ratios. According to Deutsche Bank's data, the current hedging ratio for overseas investors in US dollar assets is around 58%, compared to over 78% before the Federal Reserve began raising rates in 2022.