A strategist from the asset management giant State Street, Lee Ferridge, has indicated that the U.S. dollar faces a risk of depreciating by 10% this year. This outlook is driven by the possibility that the Federal Reserve may implement interest rate cuts more aggressively than currently anticipated by the market, particularly once a new Fed chair assumes office, which could significantly elevate monetary policy uncertainty.

Market consensus currently expects the Fed to begin cutting rates around June, with at least two 25-basis-point reductions anticipated by year-end. However, Ferridge suggests that policymakers might still enact a third rate cut in 2026. This view is partly based on the expectation that the successor to current Chair Powell could face heightened pressure from President Trump to lower borrowing costs.

During an interview at the TradeTech FX conference in Miami, Ferridge stated, "Three rate cuts are possible, while two represent a more reasonable baseline scenario. However, we must acknowledge that Fed policy is entering a phase of greater uncertainty." He further noted that deeper rate cuts would reduce the cost for international investors to hedge their U.S. asset exposures. Increased hedging activity by foreign investors would, in turn, exert additional downward pressure on the dollar.

Data shows that the U.S. dollar index has fallen approximately 1.7% year-to-date, following an almost 8% decline last year, marking its worst annual performance since 2017. Concerns over trade tensions impacting economic growth, uncertainty surrounding U.S. fiscal prospects, and continued pressure from Trump on the Fed have all weighed negatively on the dollar.

Trump has nominated former Fed governor Kevin Warsh to succeed Powell, whose term concludes in May. Ferridge believes that if Warsh is confirmed, he may implement a more accommodative monetary policy aligned with Trump's preferences to some extent.

Nevertheless, Ferridge also pointed out that in the short term, if U.S. economic data remains robust and market expectations for rate cuts moderate, the dollar could still experience a temporary rebound of 2% to 3%. Over the longer term, however, he emphasized, "Once Kevin Warsh formally takes the helm at the Fed and begins to cut rates more persistently, narrowing the interest rate differential with other global economies, a sustained sell-off in the dollar could commence."

He added that if such a scenario materializes, there remains significant room for foreign investors to increase their hedging ratios. According to State Street data, the current hedging ratio for international investors' dollar-denominated assets stands at about 58%, compared to over 78% prior to the Fed's initiation of rate hikes in 2022.