A strategist from State Street Corp., Lee Ferridge, has indicated that the Federal Reserve may implement more interest rate cuts than the market currently anticipates once a new chair takes over, potentially leading to a 10% decline in the U.S. dollar this year.

Currently, traders expect the Fed to begin lowering rates around June, with at least two 0.25 percentage point reductions by year-end. However, Ferridge suggested in an interview during the TradeTech FX conference in Miami that policymakers could have room for a third cut in 2026. This outlook partly stems from his view that the successor to Chair Powell will face pressure from Donald Trump to reduce borrowing costs.

"A third rate cut is possible," Ferridge stated. "Two cuts represent a reasonable baseline scenario, but we must acknowledge that Fed policy is entering a period of greater uncertainty."

Ferridge also highlighted that deeper rate cuts would lower the cost for foreign investors to hedge currency risk on their U.S. investments. Increased hedging activity, he noted, would exert downward pressure on the greenback.

The Bloomberg Dollar Spot Index has declined approximately 1.7% so far this year, following an 8% drop in the previous year—its worst annual performance since 2017.

Concerns over the economic impact of trade tensions, worries about the U.S. fiscal outlook, and Trump's efforts to influence Fed policy have all weighed on the dollar. Trump has nominated former Fed governor Kevin Warsh to succeed Powell, whose term expires in May. Ferridge believes that if confirmed, Warsh may align with Trump's demands.

In the near term, Ferridge suggested the dollar could rebound by 2% to 3%, as strong U.S. economic data have tempered expectations for rate cuts.

However, bearish sentiment toward the dollar is "simply waiting for Warsh to take the helm at the Fed." Ferridge added that Warsh might pursue more sustained rate reductions, narrowing the interest rate differential between the U.S. and other global economies. "If that happens, we know there is room for hedging ratios to rise."

According to State Street data, the current hedging ratio stands at about 58%, compared to over 78% before the Fed began raising rates in 2022.