Interim Report Dollar on the Ropes: Fed Rate Cuts Meets Labor Fragility
Macro Brief | August 2025
The US dollar is no longer the immovable force it once seemed. After weeks of consolidation, the Greenback is now teetering – pressured by dovish monetary signals and deteriorating labor fundamentals. My warnings since early June look like they are going to play out very soon. With the Federal Reserve poised for multiple rate cuts and the labor market flashing fatigue, the stage is set for a sharp dollar decline – potentially exceeding 4% in the coming weeks.
Fed Policy: From Hawkish Hold to Dovish Drift
Markets now price in a 93% probability of a 25-bps cut at the September FOMC meeting, with growing chatter around a 50-bps move. Treasury Secretary Scott Bessent has publicly urged the Fed to slash rates by as much as 175 bps, citing soft employment data and subdued inflation. Fed Governor Michelle Bowman, in a rare dissent, has called for three cuts this year to preempt further labor erosion.
Political Pressure Heightens the Downside Risk
This pivot isn’t about inflation moderation -- it’s about a softening labor market giving the Fed cover to yield to political pressure. The Fed is behind the curve, and core inflation confirms it. The confluence of labor weakness, sticky inflation, and overt political interference makes for ugly prospects.
My longer-term dollar target is now much lower. The more the Trump administration politicizes data and browbeats the Fed – and other Agencies – the lower that target goes. The soon-to-be-appointed head of the BLS reportedly wants to halt unemployment data releases until he “likes what he sees.” This is the kind of behavior one expects from a Third World autocracy.
Labor Market: Cracks Beneath the Surface
July’s jobs report was a wake-up call. Nonfarm payrolls added just 73,000 jobs –well below expectations – and revisions to May and June wiped out 258,000 previously reported gains. Unemployment ticked up to 4.2%, with hiring increasingly concentrated in healthcare. Manufacturing and government employment are contracting.
Beneath the surface: discouraged workers, underemployment, and declining participation are distorting the Fed’s metrics. The “no hire, no fire” dynamic may be keeping layoffs muted, but it’s masking a broader slowdown.
FX Implications: Dollar Vulnerability Rising
The US Dollar Index (DXY) has slipped to two-week lows. EUR/USD and GBP/USD are breaking key resistance levels and USD/JPY is testing key support levels. With narrowing rate differentials and global investors recalibrating exposure, downside risk is accelerating.
Gold and silver are surging. Commodities are repricing. EM currencies are finding new footing. A 4% drop from current levels would be a catch-up move – with more to follow.
Strategic Takeaways
• FX Hedging: Increase hedge ratios on USD-denominated exposures, especially in EM or commodity-linked portfolios.
• Rate Sensitivity: Reassess duration risk. The curve is steepening, and front-end volatility may rise.
• Narrative Discipline: Emphasize the shift from Fed independence to political entanglement. The dollar’s decline is not just technical – it’s institutional.
I’ll send out my normal update early next week. In the meantime, brace for volatility. And yes, the equity market is pushing hard to the topside – perhaps too hard. Until next week, good luck in the trenches.