Beware of more downside risk to the dollar, strategist warns

The US dollar index (DX-Y.NYB) is paring back some of its losses in Thursday's trading session after plunging following the Federal Reserve's 50-basis-point interest rate cut. ING FX strategist Francesco Pesole believes there may be more weakness ahead for the dollar and joins Morning Brief to lay out his case. "I think the initial reaction to the big Fed cut was not very clear for markets. They tried to make sense of the fact that the Fed did cut by 50 basis points. But then Powell, in the press conference, was quite hawkish. Now we think that moving on, it's more likely that the Fed will move in 25-basis-point steps," Pesole tells Yahoo Finance. "However, we think the markets will still prefer to err on the side of dovishness when it comes to pricing and, ultimately, they may prefer to stay on the soft side, the bearish side of the dollar into the US election." He argues that the 50-basis-point cut was "backward-looking," arguing that the Fed should have cut rates at its July meeting: "In a way, it feels more like the Fed is catching up with other central banks. You look at the Bank of Canada that moved early, obviously the European Central Bank, but also the Bank of England, so I don't think there is this very strong notion that the Fed is leading the way in monetary easing." As the 2024 presidential election lies less than two months away, Pesole notes that the market is moving closer to favoring a victory for Vice President Kamala Harris in November. He argues that the election will be very important for the dollar and explains that there is a "decent case for dollar short positions to rise into the election on the back of this Fed cut."
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