The dollar has been slipping for several months now, at a pace that varies in intensity, but slipping hard all the same: down 14.5% against the euro, down 11% against a basket of major currencies. Yesterday, it hit a four-year low against the single currency, hovering around USD 1.187 to the euro. From a purely economic theory perspective, this trend is fairly logical in light of diverging monetary policy paths. The US Federal Reserve is expected to resume its rate-cutting cycle this evening, just as the European Central Bank nears the end of its own. Lower interest rates mean a higher supply of dollars and reduced yields on dollar-denominated assets, making them less attractive to foreign investors and thus dampening demand.

For the United States, this makes imports more expensive, impacting both companies—who face higher production costs—and consumers—who must pay more at the tills. It's the inflation conundrum again. In Europe, the opposite is true, but the real concern lies in the erosion of export competitiveness, particularly for large economies like Germany and Italy, which are heavily reliant on foreign sales.

In short, rapid changes in exchange rate parity pose problems on both sides of the Atlantic—but not the same ones. That said, the enduring appeal of the US economy limits investor flight, which in turn softens the blow for America. As John Connally, Nixon’s Treasury Secretary, famously told a European delegation in the 1970s: “The dollar is our currency, but it’s your problem.”

It is, for example, a problem for both retail and institutional investors worldwide. Thanks to the rise of ETFs, gaining exposure to US assets has never been easier. But a European who bought an S&P 500 ETF on 1 January 2025 hasn’t pocketed the 12.3% return (minus fees) delivered by the index to date. In reality, they've lost about 1.35% (plus fees), courtesy of the exchange rate.

To avoid that, one needs to hedge. Which means paying extra fees—just like taking out insurance. The same S&P 500 ETF, but in a hedged version, is up 10.5% in 2025. At iShares, the hedged product carries a 0.2% fee, versus just 0.07% for the unhedged one. In other words, it was well worth brandishing the shield this year. Deutsche Bank has published research showing that 80% of the USD 7 billion that has flowed into US equity ETFs over the past three months was hedged against currency risk. That’s a sharp rise from just 20% at the beginning of the year—and even less in previous vintages, when the EUR/USD pair moved within tight ranges.

This brief digression on forex allows me to highlight one key point: the dollar’s slide has not triggered a mass investor exodus from the US. Investors are far too enamoured with American equities for that. No, instead, they’re adapting—opting to pay for currency hedges in order to stay put, even if they’ve begun to moderate their exposure and look for returns in other parts of the world.

Will this pattern hold once the Fed formally kicks off its rate-cutting cycle? It’s plausible. Step one is likely to be taken this evening, with a 25 basis point cut expected to be announced at 8:00pm. Fed Chair Jerome Powell—the man so colourfully insulted by President Donald Trump—will take the stage for a press conference to explain the decision, lay out the path ahead, and likely wrestle with dissenting voices within the institution. The market is hoping for further cuts, but it also knows Powell won’t go full throttle: inflationary pressures remain too strong for any celebratory mood.

Markets fell yesterday in anticipation of the decision—modestly in the US, where the Nasdaq 100 gave up 0.08% at the last moment, narrowly missing out on a tenth consecutive gain. Declines were sharper in Europe, where the financial sector was battered and industry took a hefty knock, resulting in a 1.8% drop in Germany’s DAX, which has been floundering since its July highs.

Elsewhere in the news, President Donald Trump held talks with Indian Prime Minister Narendra Modi in a bid to ease tensions between the two nations, though it remains unclear whether a resolution is on the horizon. The US President is also scheduled to speak with his Chinese counterpart, Xi Jinping, on Friday.

As a reminder, the Fed’s timeline is as follows: the rate decision will be announced at 8:00pm, followed by Powell’s remarks from 8:30pm—leaving 90 minutes of trading time for US markets to react.

In the Asia-Pacific region, caution prevails ahead of the Fed’s verdict. Japan’s Nikkei 225 slipped 0.2%, with Australia and Taiwan both down 0.7%, and South Korea retreating 1.1%. India fared better (+0.3%), while Hong Kong surged 1.5%, buoyed by Baidu. A rebound is expected at the open in Europe, to close the gap with the United States.

Today's Economic Highlights:

On today's agenda: Japan's adjusted trade balance; the consumer price index in the United Kingdom; in the eurozone, the consumer price index; in the United States, building permits, housing starts, DOE crude oil inventories, and the FOMC rate decision. See the full calendar here.

  • GBP / USD: US$1.36
  • Gold: US$3,676.55
  • Crude Oil (BRENT): US$68.37
  • United States 10 years: 4.03%
  • BITCOIN: US$117,106

In corporate news:

  • GSK plans to invest $30 billion in the United States over five years.
  • TotalEnergies wins tender for offshore wind farm in France.
  • Thales signs two strategic contracts with Indian company Indigo.
  • Moody's raises Axa's credit rating to ‘Aa2’ with a stable outlook.
  • Sanofi obtains positive phase IIa data with brivekimig in hidradenitis suppurativa.
  • Increase in motorway and airport traffic in August at Vinci.
  • Nestlé Chairman Paul Bulcke is stepping down at the end of the month and will be replaced by Pablo Isla.
  • ThyssenKrupp receives an offer from Jindal Steel for its steel division.
  • SES is partnering with K2 Space to develop a medium Earth orbit network.
  • Nordex is entering the Ecuadorian market with a 112 MW wind power project.
  • Adler has finalised the sale of a residential development project in Berlin to the Hilpert group.
  • Verisure hopes to raise more than €3 billion through an IPO in Stockholm.
  • Goldman Sachs and Morgan Stanley win appeal against Archegos investors and their insider trading lawsuit.
  • Oracle, Silver Lake and Andreessen Horowitz are part of the investor consortium that will control 80% of TikTok, according to the WSJ.
  • YouTube (Alphabet) enters a new era of AI with an arsenal of new tools.
  • Microsoft announces £24 billion investment in the UK.
  • The FDA warns Hims & Hers against misleading claims about diabetes and weight loss drugs.
  • A clinical trial by Eli Lilly shows that weight loss with its experimental pill flattens out over time.
  • The CEO of United Airlines rules out any bid for Spirit's assets.
  • CrowdStrike acquires Pangea.
  • Rivian estimates that its Georgia plant will create 7,500 jobs by 2030.
  • Tesla settles lawsuit over 2019 fatal accident involving Autopilot software in exchange for an undisclosed amount.
  • Baidu shares soar in Hong Kong amid optimism about the group's AI chip plans.
  • Keppel signs agreement with Dell Technologies for AI platforms.
  • S&P raises Vale's rating from ‘BBB-’ to ‘BBB’ with a stable outlook.
  • Chinese carmaker Chery Automobile is seeking up to $1.2 billion in an initial public offering in Hong Kong.

See more news from UK listed companies here

Analyst Recommendations:

  • Rio Tinto Plc: Landesbank Baden-Wuerttemberg maintains its buy recommendation and reduces the target price from GBX 5600 to GBX 5300.
  • Centrica Plc: Morgan Stanley upgrades to overweight from market weight with a price target raised from GBX 175 to GBX 210.
  • Sage Group Plc: Jefferies maintains its buy recommendation and reduces the target price from GBX 1480 to GBX 1320.
  • Essilorluxottica: Rothschild & Co Redburn upgrades to buy from neutral with a price target raised from EUR 235 to EUR 320.
  • Inpost S.a.: Oddo BHF maintains its outperform recommendation and reduces the target price from EUR 22 to EUR 20.
  • Dsv A/S: ABG Sundal Collier upgrades to buy from hold with a price target raised from DKK 1550 to DKK 1600.
  • Orsted A/S: Bernstein maintains its market perform recommendation and reduces the target price from DKK 220 to DKK 120.
  • Rheinmetall Ag: William O'Neil & Co Incorporated initiates coverage with a buy recommendation.
  • L'oréal: HSBC maintains its hold recommendation and raises the target price from EUR 355 to EUR 377.
  • Anheuser-Busch Inbev Sa/Nv: Morgan Stanley maintains its overweight recommendation and raises the target price from USD 81 to USD 82.
  • Delivery Hero Se: JP Morgan maintains its overweight recommendation and raises the target price from EUR 29 to EUR 34.