State Street Corp. is warning that the U.S. dollar could plummet by 10% this year if the Federal Reserve implements more aggressive interest rate cuts than currently anticipated by the market. This projection comes from Lee Ferridge, a strategist at State Street, who believes that the appointment of a new Fed chair could trigger such a scenario.

Currently, market expectations point towards the Fed beginning to lower interest rates around June, with at least two quarter-point reductions by the end of 2026. However, Ferridge suggests there's a possibility of a third rate cut, especially if President Trump's nominee, former Fed Governor Kevin Warsh, succeeds Jerome Powell as Fed chair in May. Ferridge anticipates that Warsh would face pressure from Trump to reduce borrowing costs.

Ferridge, speaking at the TradeTech FX conference in Miami, stated that while two rate cuts are a reasonable base case, the possibility of three cuts cannot be ruled out, emphasizing the increasing uncertainty surrounding Fed policy. He explained that deeper rate cuts would reduce the cost for foreign investors to hedge currency risks associated with their U.S. investments. Increased hedging activity by these investors could then exert downward pressure on the dollar.

The U.S. Dollar Index, which tracks the dollar's value against six major currencies, already fell by nearly 10% in 2025, marking its worst year since 2017. Concerns regarding trade friction, the U.S. fiscal outlook, and Trump's previous pressure on the Fed have also contributed to the dollar's weakness.

Lower interest rates typically decrease the attractiveness of dollar-denominated assets, such as bonds, to investors. This is because falling rates lead to smaller returns on these investments. As interest rate differentials narrow, overseas investors are more inclined to hedge their currency exposure, further contributing to potential dollar weakness.

While Ferridge acknowledges the potential for a near-term dollar rebound of 2%-3% due to strong U.S. economic data reducing expectations for Fed cuts, he believes that dollar selling is "just waiting for once Kevin Warsh takes over the Fed". He anticipates that Warsh might implement more persistent rate cuts, narrowing the interest rate gap between the U.S. and other regions.

State Street's data indicates that the current hedge ratio is around 58%, significantly lower than the level of above 78% observed before the Fed began hiking rates in 2022. This suggests that there is room for hedging ratios to increase, potentially amplifying the downward pressure on the dollar if the Fed cuts rates more aggressively. Some analysts suggest that a weaker dollar could also stimulate demand for risk assets like Bitcoin.