The US dollar could fall by as much as 10% this year if the Federal Reserve moves to cut interest rates more aggressively than markets currently expect, according to State Street Corp. strategist Lee Ferridge.
Markets are currently pricing in the first Federal Reserve rate cut around June, followed by at least two quarter-point reductions before the end of the year. However, Ferridge believes a third rate cut in 2026 is a realistic possibility, especially once a new Fed chair takes office.
This outlook is partly driven by political pressure. The successor to current Fed Chair Jerome Powell is expected to face calls from US President Donald Trump to lower borrowing costs and stimulate the economy.
“Three cuts are possible,” Ferridge said while speaking at the TradeTech FX conference in Miami. “Two cuts remain the base case, but we are entering a much more uncertain phase for Federal Reserve policy.”
Ferridge explained that deeper rate cuts would reduce the cost for foreign investors to hedge currency exposure on US assets. As hedging activity increases, demand for the dollar could weaken, placing further downward pressure on the currency.
He added that concerns around trade tensions and the US fiscal outlook have already weighed on the dollar. These pressures have intensified alongside Trump’s influence on Fed policy. Trump has nominated former Fed Governor Kevin Warsh to replace Powell when his term ends in May.
In the short term, Ferridge expects the dollar could recover by 2% to 3% if strong US economic data forces markets to scale back expectations for rate cuts. However, he believes broader dollar selling is likely to resume once Warsh takes over and begins cutting rates more persistently, narrowing interest rate differentials with other major economies.
State Street data shows that current currency hedge ratios stand near 58%, well below the levels above 78% seen before the Federal Reserve began raising rates in 2022.
