Dollar ETF Sags, Yen ETF Rallies on Fed Rate Cut
The greenback was a Fed rate cut loser.
There were a lot of winners from last week’s big rate cut announcement—the SPDR S&P 500 ETF Trust (SPY) surged a record high, as did the SPDR Gold Trust (GLD).
But one big loser was the Invesco DB U.S. Dollar Index Bullish Fund (UUP), which fell by 0.4% in the day following the Fed decision.
The value of the greenback versus rival currencies is around its lowest levels since mid-2023. The widely followed U.S. Dollar Index was last trading just above 100, which is the bottom of a two-year trading range. On Wednesday, the U.S. central bank slashed the federal funds rate by 50 basis points, the larger of two cuts it was considering amid concerns that a slowing job market and potential recession have become a bigger threat to the U.S. economy than inflation.
Of course, the dollar’s weakness stems from expectations that the gap between interest rates in the U.S. and elsewhere will shrink significantly over the next year.
For instance, futures suggest that the Fed could lower rates to 3% by the middle of next year, while the European Central Bank might cut rates to 2%— equal to a gap of 100 basis points versus 150 basis points today.
The Yen Strengthens
The closing of the gap is even starker for rates in the U.S. versus Japan, where the Bank of Japan is expected to hike rates from current levels of 0.25% to 0.5% by the middle of next year. The Bank of Japan has been decidedly more dovish in recent years than other central banks.
The start of the Fed’s likely rate-cutting cycle has been especially bullish for the Japanese yen, which has rallied from almost 162 to 141 versus the dollar over the past month.
ETF investors have noticed. The $444 million Invesco CurrencyShares Japanese Yen Trust (FXY) is the largest fiat currency ETF today thanks to year-to-date inflows of $131 million.