Dollar Dips as Markets Anticipate Federal Reserve Rate Cut; On Track for Monthly Decline
By Laura Matthews
August 29, 2025 | Updated 7:34 PM UTC
The U.S. dollar weakened against major currencies on Friday, continuing a downward trend that places it on course for a nearly 2% drop throughout August. Market participants are increasingly pricing in a Federal Reserve interest rate cut expected at the central bank’s upcoming September meeting.
Dollar Slides Amid Rate Cut Speculation
Following the release of U.S. inflation data that was largely in line with expectations, the dollar initially gained ground but soon conceded those benefits. The Personal Consumption Expenditures (PCE) Price Index — the Fed’s preferred inflation gauge — showed a 0.2% rise in July, down slightly from June’s unrevised 0.3% increase. This data reinforces expectations that the Fed will ease monetary policy next month.
Money markets now assign an 87% probability to an interest rate reduction at the Federal Reserve’s September 16-17 meeting, according to CME’s FedWatch tool, up from 63% a month prior. Reflecting this sentiment, the dollar index, which measures the greenback against a basket of currencies, was down 0.09% at 97.803 in afternoon trading.
Dan Tobon, Citi’s Head of G10 FX Strategy, noted, “Foreign exchange markets remain range-bound as investors await the U.S. labor market report due September 5th. It’s all eyes on the data moving forward.”
Political Turmoil Adds to Market Jitters
Alongside economic indicators, investor sentiment toward the dollar is being influenced by political developments. President Donald Trump’s recent efforts to reshape Federal Reserve leadership, including his move to fire Fed Governor Lisa Cook, have stirred uncertainty. A federal judge announced plans to expedite hearings on Cook’s request to block her dismissal as she pursues legal action against the president’s decision.
“This market instability is further fueled by intense media coverage surrounding Governor Cook’s contested dismissal,” said Uto Shinohara, Senior Investment Strategist at Mesirow Currency Management. Trump has criticized the Fed and Chair Jerome Powell for resisting rate cuts, while Fed Governor Christopher Waller—who is considered a possible successor to Powell—has expressed support for starting rate cuts next month and anticipates additional reductions to bring policy rates closer to neutral.
Mixed Currency Movements
The euro showed modest strength, rising 0.11% to $1.1696, buoyed by stable inflation expectations in the euro zone according to a recent European Central Bank poll. The euro and British pound both gained over 2% against the dollar for the month.
The dollar edged up slightly against the Japanese yen to 146.985 yen but remains 2.5% weaker for August. Conversely, it lost 0.26% against the Swiss franc, trading at 0.7997, accumulating a 1.3% monthly decline.
Global Currency Highlights
- The New Zealand dollar strengthened marginally following the resignation announcement of Reserve Bank of New Zealand Chairman Neil Quigley, who cited challenges linked to the prior governor’s departure.
- China’s yuan reached its strongest level in ten months against the dollar, supported by steady central bank policy and a buoyant domestic stock market.
- The Indian rupee dropped to a record low amid concerns over the economic effects of steep U.S. tariffs on Indian imports.
Looking Ahead
Investors are expected to remain cautious heading into early September, closely monitoring the U.S. labor market report scheduled for release on September 5, which could influence the Fed’s policy decisions. Market participants are balancing optimism from U.S. equity gains in August against lingering concerns about consumer sentiment and political developments affecting the Federal Reserve’s independence.
As the dollar navigates a subtle interplay of economic data and political factors, currency markets are likely to remain volatile in the weeks leading up to the Fed’s critical policy meeting.
For ongoing market updates and expert insights, stay tuned to Smart Money Mindset.
Reporting by Laura Matthews and Jaspreet Kalra; editing by Alison Williams, Richard Chang, and Leslie Adler.
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