US Dollar Falls, Euro Gains, Rupee Collapses

It would seem that the new month would begin relatively quietly on the currency market, due to the Labor Day celebrations in the US, which are a holiday on Wall Street. However, a combination of events has caused significant volatility to be observed early in the morning, particularly in pairs linked to the US dollar. Late in the morning, we see EUR/USD trading at almost a one-month high. In the broader market, it's worth noting the historically low Indian rupee exchange rate due to the impact of increased US tariffs on India.

The US dollar is under pressure from rising expectations of cuts from the Federal Reserve. The market is hoping for a faster cycle of interest rate cuts amid deteriorating labor market data and Jerome Powell's dovish speech in Jackson Hole. Donald Trump's tariffs remain in question. A federal appeals court decided that the tariffs were illegal and constituted an abuse of the power of the office of president. Further rulings could contribute to the removal of tariffs, which, as a pro-inflationary factor, limit the Fed's ability to ease monetary policy. Currently, the probability of a 25 basis point rate cut at the next FOMC meeting is approximately 88%. Among the G10 currencies, it is worth paying particular attention to EUR/USD pair, which is gaining 0,3%.

The EUR/USD rally stems not only from the dollar's weakness but also from the euro's strength. Strong PMI results from most eurozone countries reinforce the European Central Bank's position on its current policy. The likelihood of further cuts is very limited, and investors expect the European economy to have overcome the most challenging period and the risk of recession has now been averted. The exchange rate is supported by positive industrial data, improved business sentiment, and a lack of further deterioration in the labor market.

The rupee is collapsing

The Polish złoty remains strong, even amid mixed data. While GDP for the second quarter rose by 3,4% year-on-year, as expected, the PMI remained well below 50 for the fourth consecutive month. The złoty exchange rate against two key global currencies, the euro and the dollar, remains stable. However, the further policy of the National Bank of Poland (NBP) remains in question, as it may exert pressure on the exchange rate with its policy.The next Monetary Policy Council decision will be announced on Wednesday. While expectations point to cuts, uncertainty surrounding energy price cuts and the high deficit mean we cannot be 100% certain that interest rates will return to even lower levels in Poland.

The Indian rupee is experiencing a serious crisis and is currently the weakest currency in all of Asia. The rupee is trading at 88,3 rupees per dollar, its weakest ever against the US currency.This year alone, the currency has lost over 6% against the dollar. There are several reasons for this. Investors are withdrawing capital from the country, fearing an economic slowdown and the policies of the government and central bank. The trade conflict with the US and the specter of secondary sanctions resulting from the commodity trade with Russia have added fuel to the fire.

At 11:00 a.m. the dollar will cost 3,6308, the euro 4,2586, the franc 4,5431 and the pound 4,9136.

Source: Kamil Szczepański, XTB