(Bloomberg) — The proximity of the Federal Reserve’s shift to interest-rate cuts is battering the US dollar this month, sending the world’s reserve currency slumping and igniting rallies in major peers around the globe.

The Bloomberg Dollar Spot Index has dropped almost 2% in August so far, marking the steepest drop since markets prematurely braced for such a pivot by the US central bank late last year. This time, though, Fed officials have been clear that they’re finally ready to start easing for the first time since 2020 as inflation cools.

That has pulled down US bond yields and curbed fears of a recession that could stall the global economy, giving traders incentive to plow into higher-yielding investments overseas. As a result, nearly all major currencies tracked by Bloomberg have rallied against the dollar this month, with gains of at least 4% in the New Zealand dollar and Swedish krona.

Such large moves came in a volatile month for the $7.5-trillion-a-day currency market. The dollar’s slide was fueled by a brief period of market turmoil and an exodus from the Japanese carry trade in early August. The greenback dropped further when Fed Chair Jerome Powell last week said it was time to start cutting rates, though it has since pared some of the decline.

“The dollar has really been trading on Fed easing expectations,” said Skylar Montgomery Koning, a foreign-exchange strategist at Barclays in New York. “That has pretty much been the singular driver.”

While the greenback gauge ticked higher on Thursday after data showed the US economy grew at a slightly stronger pace in the second quarter than initially reported, it has fallen in every week so far this month.

Confidence that policymakers will soon start easing has emboldened traders to make riskier investments, said Valentin Marinov, head of G-10 FX strategy at Credit Agricole SA in London. That’s fueled demand for high-yielding currencies such as the New Zealand dollar.

“The build-up of Fed rate cut expectations helped ease the US and global financial conditions and thus propped up risk sentiment,” he said.

What Bloomberg strategists say…

“So the dollar may attempt to recoup some of its recent losses considering how much it has sold off, but a resounding comeback looks remote if market pricing on the Fed is largely right.”

— Ven Ram, cross-asset strategist. Read more on MLIV.

A rebound in global equities, lower US yields and cheap levels have spurred rallies in the kiwi, krona and Canadian dollar despite the prospect of domestic easing that would typically apply downward pressure.

New Zealand’s central bank began its easing cycle earlier than previously signaled, as policymakers reckon their economy has fallen into its third recession in less than two years, while the Bank of Canada is just days away from what’s expected to be a third-consecutive rate cut. At the same time, Sweden’s Riksbank cut rates by just 25 basis points last week, having discussed a potential half-point reduction.

Now, attention narrows further on the path for US interest rates. Traders are pricing in at least a quarter-point cut in September, and a total of about 1 percentage point worth of easing by the end of 2024.

“There’s a risk that the US economy can remain exceptional, but the mismatch in global balance of payments triggers a big unwind of long dollar positions,” said Kit Juckes, chief FX strategist at Societe Generale SA.

Traders have struggled to predict the Fed’s trajectory ever since it started raising interest rates over two years ago, both prematurely pricing in cuts and underestimating the strength of the economy, so some are mindful of the risk that could be happening again.

Nathan Thooft, a senior portfolio manager at Manulife Investment Management in Boston, said market expectations for Fed cuts are too aggressive given the US economy is still faring relatively well compared to the rest of the world. He expects the dollar’s losses to be limited going forward.

“We don’t have a high level of confidence to make big currency bets,” he said. “I can see the rationale behind why people are buying into something like the Swiss franc, as an example, but we’re not actively playing those trades.”