Dollar weakens against basket of currencies, euro exchange rate above 1.10 dollars

In the currency markets, the value of the dollar against a basket of currencies fell last week as expectations solidified that the US Fed will lower interest rates in September, pushing the euro exchange rate above 1.10 dollars.

The dollar index, which shows the value of the US dollar against six major world currencies, weakened by 0.7 percent last week to 102.40 points. Meanwhile, the dollar exchange rate against the euro fell by about 1 percent, bringing the price of the euro to 1.1027 dollars.

However, the US currency strengthened against the Japanese yen by 0.7 percent, reaching an exchange rate of 147.60 yen.

The weakness of the dollar against most major world currencies is a result of solidified expectations that the US central bank will lower interest rates at its meeting next month. Last week, published data on consumer and producer prices showed that inflation in the US continues to gradually ease, slowly approaching the Fed’s target level of 2 percent. As a result, the market estimates that there is about a 75 percent chance that the Fed will lower interest rates by 0.25 percentage points in September.

About ten days ago, it was estimated that there was a high possibility that the Fed would lower rates by a sharper 0.5 percentage points at that meeting, as investors feared recession in the US economy. However, the prospects for both recession and a sharper rate cut subsided last week following a report on solid consumption growth in the US, the largest driver of gross domestic product (GDP).

Fears of recession also eased thanks to a report on falling unemployment, indicating that the labor market remains strong.

To mitigate the interest rate differential between the US and European central banks, the euro exchange rate broke above 1.10 dollars last week, close to its highest level this year.

Next week, investors will focus on the speech of Fed Chairman Jerome Powell at the traditional annual meeting of central bankers in Jackson Hole. It remains to be seen whether Powell will ‘signal’ that expectations for a rate cut in September are justified.