Could a 50bps Fed Rate Cut Push the Dollar to New Lows Amid Geopolitical Uncertainty?

2025 has been a challenging year for the world’s most traded currency, and with calls for the Federal Reserve to cut interest rates by 50 basis points, the US dollar may be about to sink far lower.

This year has seen the USD tumble more than 10%, bucking an upward trend that had been in place since 2011.

The Fed had opted against cutting rates in August, sparking criticism from the Trump administration. Now, with July inflation data holding firm at an annual rate of 2.7%, a touch lower than Wall Street Journal expectations of 2.8%, the case for cuts at the Federal Reserve’s September 16-17 meeting has become exceptionally strong.

Traders in contracts tied to the benchmark federal funds rate are now putting the odds of a 25bps cut in September at 99.99%, according to the CME Group’s FedWatch tool, which monitors Consumer Price Index data.

However, Treasury Secretary Scott Bessent has gone one step further and advocated for a 50 basis point cut in September. But what could a major cut mean for the US dollar and the wider forex landscape?

Double-Edged Rate Cuts

The Trump administration has been pressuring the Federal Reserve to cut rates since the President’s return to the White House, but so far, Fed chair Jerome Powell has resisted pressure.

Now that a cut next month is priced in as a virtual inevitability, we’re set to see the US dollar react to the return of borrowing at corporate and consumer levels.

While lower interest rates boost borrowing and foster growth on Wall Street, helping stocks to grow and companies to innovate, it’s a different story for the forex landscape.

Rate cuts generally make a country’s assets, like bonds and savings accounts, less attractive to foreign investors, and the United States is no exception to this rule. This is because they can look elsewhere for stronger yields from higher rates. This decreasing demand for USD would then result in a weaker currency.

President Trump has previously called for interest rates to fall to 1% and is a vocal supporter of a weaker dollar.

Trump has cited the benefits of tourism and trade in a weak dollar environment, but analysts are concerned that a prospective 1% interest environment could carry severe economic consequences.

Tina Fong, economist at Schroders, has suggested that while prospective interest rates at 1% could lower borrowing costs in a way that boosts government spending, they could also lead to an increase in debt sustainability concerns, pushing bond yields higher as investors look for more compensation against sovereign risk.

Weakness Against Commodity-Backed Currencies

We’ve also seen USD struggle against commodity-backed currencies like the Canadian dollar (CAD). In the case of CAD, stable crude oil prices have helped to provide a level of resilience. It’s also worth noting that Canada is the largest oil exporter to the United States.

This could lead to a heavier imbalance in the ongoing trade tensions between the United States and Canada, which may see new opportunities for traders seeking to back growth between CAD/USD.

However, it’s also worth noting that current trends in crude oil are largely dictated by Russia’s war in Ukraine. The price of the commodity could be heavily impacted by Trump’s attempts to broker a ceasefire in his talks with President Vladimir Putin.

Trump’s Talks with Putin – The Aftermath

After Trump and Putin’s meeting on August 15, the wider geopolitical climate could also have an impact on USD/EUR. Despite USD/EUR remaining fairly neutral after the meeting, traders are on the wait for subsequent talks and negotiations.

The fear in Europe is that direct talks between the US and Russia could leave the continent frozen out in the pursuit of its own regional interests and assurances over stability.

Despite this, we can expect to see the dollar continue its decline against the euro as expectations of Federal Rate cuts outweigh Europe’s own geopolitical concerns on the FX trading floor. However, evidence of a closer alignment between Trump and Putin could see investor jitters hit the euro harder.

Life in a Low-Rate Environment

Trump’s protectionist policies appear to favor a weaker dollar if it helps to lower interest rates in the United States, but the weakening currency could carry significant implications not only in the forex landscape but also for the world’s view of the dollar as its favorite reserve currency.

Traders can expect plenty of volatility in the months ahead, and a prospective 50bps at the Federal Reserve’s September meeting could offer plenty of opportunities for more speculative traders in the coming weeks.

The age of Trump 2.0 has brought plenty of challenges and opportunities to the world of forex in 2025. Don’t expect the rollercoaster to slow down any time soon.