Dollar Weakens as Markets Anticipate Federal Reserve Rate Cut; Set for Monthly Decline
By Laura Matthews | August 29, 2025
The U.S. dollar declined against key currencies such as the euro and Swiss franc on Friday, positioning itself for an approximate 2% drop in August against a basket of currencies. Investors are increasingly pricing in a Federal Reserve interest rate cut in the upcoming September meeting, marking a shift in market sentiment despite in-line inflation data.
Inflation Data and Market Reactions
Earlier on Friday, the U.S. Commerce Department released its Personal Consumption Expenditures (PCE) Price Index figures, showing a 0.2% increase in July following an unrevised 0.3% rise in June. This inflation data aligned with economists’ expectations and did not significantly alter the market’s outlook. The dollar initially strengthened after the report but failed to sustain gains, ultimately continuing its losing streak over the past three days.
Current market pricing indicates an 87% probability of a Federal Reserve rate cut at the September 16-17 Federal Open Market Committee (FOMC) meeting, a notable increase from 63% just a month ago, according to CME’s FedWatch tool. This growing expectation is driving the dollar lower, reflected in the dollar index’s decline of 0.09% to 97.803 during Friday afternoon trading.
"The FX markets are remaining range bound as investors await the next U.S. labor market report due on September 5," commented Dan Tobon, head of G10 FX strategy at Citi. The labor data will be a crucial indicator for Federal Reserve policy decisions in the weeks to come.
Political Factors Weighing on the Dollar
Adding to market jitters is an ongoing legal confrontation between U.S. President Donald Trump and Federal Reserve Governor Lisa Cook. Trump’s recent attempt to dismiss Cook, a move challenged in court, has sparked concerns over the central bank’s independence. A federal judge announced plans to fast-track briefing schedules to address Cook’s efforts to block her removal while she pursues a lawsuit against the president’s authority to fire her without valid cause.
"Our market stability remains sensitive to media coverage surrounding Fed Governor Cook’s legal proceedings," noted Uto Shinohara, senior investment strategist at Mesirow Currency Management. Trump’s broader campaign to influence the Fed includes criticisms of Fed Chair Jerome Powell for not accelerating interest rate cuts, with implications for future monetary policy outlook.
Supporting the likelihood of rate easing is Fed Governor Christopher Waller, reportedly under consideration by Trump to succeed Powell. Waller expressed intentions to begin cutting rates next month and anticipates a series of cuts to realign policy rates toward a neutral stance.
Currency Movements and International Context
The euro benefitted from a relatively stable inflation environment, advancing 0.11% to $1.1696. Inflation expectations among euro zone consumers held steady at or above the European Central Bank’s (ECB) 2% target, supported by inflation data from France and Spain showing moderate price growth.
Sterling remained flat at $1.3502 but, along with the euro, has gained over 2% against the dollar this month. Meanwhile, the dollar edged slightly higher against the Japanese yen by 0.02% to 146.985 yen but is down 2.5% over August.
The Swiss franc strengthened, pushing the dollar down 0.26% to 0.7997 CHF, a decline of 1.3% for the month. Elsewhere, the New Zealand dollar gained ground after the Reserve Bank of New Zealand Chairman Neil Quigley announced his resignation, linked to internal challenges at the central bank.
In Asia, China’s yuan reached its strongest level in 10 months against the dollar amid steady central bank fixings and a robust domestic stock market. Conversely, the Indian rupee fell to a record low, pressured by concerns over U.S. tariffs on Indian imports and their possible economic ramifications.
Looking Ahead
With inflation data largely confirming expectations and political tensions involving the Federal Reserve escalating, market participants will closely monitor the upcoming U.S. jobs report on September 5. The labor market’s performance is poised to shape the Federal Reserve’s policy path and, consequently, the dollar’s trajectory in the near term.
About the Author
Laura Matthews is a financial markets reporter specializing in foreign exchange and economic policy developments.
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