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Cailianshe News, August 21 (Editor: Xiaoxiang)While domestic investors have recently cheered for the continued rebound of the RMB, the US dollar is actually at its weakest stage of the year in the global foreign exchange market.

Market data shows that the US dollar has fallen to its lowest level since the beginning of the year as investors prepare for the Federal Reserve to start cutting interest rates.The ICE Dollar Index (DXY), which measures the greenback’s strength against a basket of six major currencies, has fallen 2.5% so far this month and hit its lowest level since Jan. 1 at 101.30 early in the day.

The plunge in the U.S. dollar has undoubtedly driven a rebound in a range of other non-U.S. currencies. The euro rose to its highest level of the year on Tuesday, surpassing the critical 1.11 mark. The pound also rose by nearly 50 points that day, reaching a high of $1.3053, the highest level since July 2023.

“If U.S. growth slows while global growth remains relatively stable, this should lead to further weakness in the dollar,” said Vasileios Gkionakis, head of European economics and strategy at Aviva Investors.

The many major macro news events this week have apparently caused many dollar bulls to choose to leave the market and wait and see at this stage.Federal Reserve Chairman Jerome Powell is about to deliver a speech at the Jackson Hole central bank annual symposium this Friday, and traders will carefully look for signs whether the Fed may cut interest rates by 25 basis points or more in September.

Before this critical event, the U.S. Bureau of Labor Statistics will also release the preliminary report on non-farm employment and wages (QCEW) for the first quarter of 2024 at 22:00 Beijing time tonight, and will adjust the non-farm data for the past year ending at the end of March based on this data. Some industry insiders are already worried that the number of jobs added in the United States in the year ending in March may not be as strong as initially estimated.

Goldman Sachs andWells FargoEconomists at the University of Wisconsin-Madison expect the government's preliminary benchmark revision data to be released on Wednesday to show that nonfarm payrolls in the United States grew by at least 600,000 jobs weaker than currently estimated in the year to March, equivalent to about 50,000 per month.JPMorgan ChaseForecasters at , however, believe the downward revision will be around 360,000, whileGoldman SachsThe report said the number could be as high as 1 million, which could heighten investors' concerns that the U.S. economy is heading into a recession.

Barclays Bank"The currency market continues to get excited about the possibility of dovish tone coming out of the Jackson Hole symposium," said Skylar Montgomery Koning, a currency strategist at FX Strategist. "Speculation on Tuesday that the jobs data could be significantly revised down also fueled that view."

Bank of AmericaAthanasios Vamvakidis, head of G10 foreign exchange strategy at FX Markets, pointed out that the market is looking forward to a soft landing and a rate cut by the Federal Reserve, which is unfavorable to the U.S. dollar. He added that strong consumer spending and optimistic expectations that the Federal Reserve will continue to cut interest rates several times this year are "good for risk sentiment" but not good for the U.S. dollar because "the U.S. dollar is still overvalued."

Before this round of declines, the dollar had actually risen by more than 4% in the first half of this year as the resilience of the US economy surprised investors. However, the claim of US economic "exceptionalism" has encountered many challenges in recent times.

“We expect a mild recession in the U.S. The U.S. economy is definitely slowing and converging with other countries,” said Jane Foley, head of foreign exchange at Rabobank.

She added that despite weakness in German manufacturing, the euro - the dollar's biggest rival - has been "very strong" since early July - having gained about 3% against the greenback.

Has the U.S. dollar also become a “chess piece” in arbitrage transactions?

It is worth mentioning that as the US dollar has been weakening recently, a new theory has emerged in the market: whether the US dollar is also playing the role of financing currency in carry transactions.

Kristjan Kasikov, global head of foreign exchange quantitative investment solutions at Citigroup, said in a recent report that carry trades have made a comeback, but this time there is a key difference from the past - the currency used by hedge funds as financing is not the Japanese yen, but the US dollar.

In recent weeks, investors have increased their bets on the Federal Reserve to cut interest rates by more than 100 basis points this year, and given that the Bank of Japan may still raise interest rates further, the old pattern of betting on strong U.S. growth and bottoming Japanese borrowing costs has been broken.

“We have seen the market start to become more bearish on the dollar, with speculation of a rate cut environment fueling risk appetite,” Kasikov said.

This is a key turning point since the yen carry trade was hit hard earlier this month. Kasikov said hedge funds using carry trade strategies may choose to borrow in dollars rather than yen given the prospect of diverging interest rates in the United States and Japan.

Although the current US federal funds rate is still at a high level of more than 5%, compared with some emerging market currencies with double-digit interest rates, the relevant carry trade is still not completely unprofitable. And according to the current interest rate market pricing, the Federal Reserve is likely to cut interest rates by about 200 basis points in the next year.

Kasikov said that since August 5, hedge funds have been using borrowed dollars to buy emerging market currencies, including the Brazilian real and the Turkish lira.

In fact, what many senior foreign exchange traders have not forgotten is that historically, the US dollar has long been one of the mainstream choices for financing currencies in carry trades, especially during the Federal Reserve's zero interest rate easing policy phase over the past decade.

However, Kasikov also said that Citigroup expects the window of time in which global carry trades perform well to be short as turmoil surrounding the U.S. presidential election could cause volatility to surge again.

“We have been concerned about the FX carry trade for some time,” he said. “The U.S. election and political calendar will bring more volatility to the market and heighten risk aversion.”