Unfortunately, there is not a clear-cut relationship between the dollar and the end of the cycle and the upcoming interest rate cuts.
We had a significant strengthening of the dollar in 2014-2015 and 2021-2022 - that is, immediately before the interest rate hiking cycles. By coincidence, the dollar index increased by approximately 27% in both those periods - see Figure 1.
In the 2015-2020 cycle of rate hikes/cuts, the dollar index practically did not change from March 2015 (index level 100.18) to February 2020 (index level 99.78). But of course, in the meantime, it was moving in the range of approximately +/- 7% - see Figure 2.
3 rate cuts in 2019 did not make an impression on the dollar.
In the current cycle of FED rate hikes, the dollar strengthened only until September 2022, and the FED ended the its hiking cycle almost a year later in July 2023 - see Figure 3.
The 2022 dollar peak partially included a premium for the market discounting the recession (the S&P500 was then 25% in down from its previous peak). The dollar then fell 12.6% and marked a local low at the time of the de facto last rate hike by the FED. Since then, it has been moving in a relatively sideways trend, with two stronger increases when markets expected a relatively more hawkish Fed. This is clearly visible in the correlation of the dollar with the yield of 10-year US bonds - see Figure 4.
All-in-all, I would expect a weaker dollar if:
(i) the FED no longer intends to raise rates,
(ii) the labor market report for April was not dovish on one occasion but rather the labor market continues to slowly weaken,
(iii) "hope disinflation" report on inflation for April is a harbinger of more dovish inflation readings in the following months.
For the dollar to strengthen, a stronger hawkish narrative regarding rate hikes etc. should return - or in other words, 10Y yields should move closer to 5%.
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