In this round of the Federal Reserve's interest rate cut cycle, how will the US

As the Federal Reserve's interest rate cut looms, the global economy faces increasing uncertainty, and the market is highly attentive to the future trajectory of the US dollar.

A recent research report published by Goldman Sachs indicates that historical data shows the US dollar's performance during the Fed's rate-cutting cycles is not uniform but is influenced by the policies and economic conditions of other major economies worldwide.

Goldman Sachs categorized the rate-cutting cycles from 1995 to 2020 into "coordinated" and "uncoordinated" types, finding that coordinated rate-cutting cycles are generally more favorable for the US dollar, while uncoordinated cycles are detrimental.

In the past three months, several G10 central banks have already begun to ease monetary policy. Goldman Sachs believes that this could form a relatively coordinated global rate-cutting cycle, thereby helping to alleviate the downward pressure on the US dollar from the Fed's rate cuts.

Historical performance varies, and the US dollar's trend has no fixed pattern.

Goldman Sachs' analysis shows that during the seven Fed rate-cutting cycles since 1995, the US dollar's performance has not followed a unified pattern. In some cycles, the dollar has been strong, while in others, it has been weak.

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The traditional "smile curve" theory for the US dollar suggests that the dollar performs well in two extreme scenarios: either the global economy is very poor (the dollar strengthens as a safe-haven currency), or the US economy performs exceptionally well (capital flows back into US dollar assets).

However, Goldman Sachs argues that despite the dollar's safe-haven status, its performance in the face of a slowdown in US economic growth depends on the conditions of other economies worldwide. If other economies continue to grow robustly, the dollar may not strengthen due to the US's economic issues.

Goldman Sachs cites the example of the US dollar's trend from late 2007 to early 2008:

From late 2007 to early 2008, as the US economy slowed down, the dollar weakened. This was because, at that time, economic growth in other regions of the world was relatively strong, and the market believed that the US's economic problems were primarily domestic and had not spread to other areas.Global policy coordination becomes key, and the US dollar's performance changes with the situation.

Goldman Sachs classified each easing cycle from 1995 to 2020 as "coordinated" or "uncoordinated," meaning that if at least four other G10 central banks began to cut interest rates within six months of the Federal Reserve, the cycle was considered coordinated. Otherwise, the cycle was deemed uncoordinated.

The research report particularly emphasized the importance of policy coordination among G10 central banks globally. Goldman Sachs stated that during coordinated easing cycles, the US dollar tends to outperform other G10 currencies; whereas in uncoordinated cycles, the dollar may weaken relatively.

In the past three months, several G10 central banks have successively eased monetary policy, and the market expects the Federal Reserve to accelerate its shift towards a looser policy in the near future. Currently, the market's expectation for a 25 basis point rate cut by the Federal Reserve next week has strengthened, while expectations for a more significant cut have diminished. However, an increasing number of traders are preparing for a 150 basis point rate cut in January of the following year.

Goldman Sachs pointed out that other central banks may continue to loosen policies after the Federal Reserve begins to cut interest rates, thus forming a relatively coordinated global easing cycle.

In this context, some G10 currencies, such as the British pound, have performed prominently. Although the pound mainly benefits from the risk improvement brought about by the global easing policy, a reduction in the Bank of England's easing policy should have a certain degree of positive impact on the currency.

Goldman Sachs noted that the US economy has a higher growth standard compared to other countries, which may alleviate the downward pressure on the US dollar from the Federal Reserve's rate cuts.