As the Federal Reserve's September interest rate cut approaches, some banks have already taken the initiative to reduce the interest rates on US dollar deposits. On August 17th, Jiangsu Bank lowered the interest rates for US dollar deposits, with the annual interest rate for US dollar deposits with a minimum deposit of $10,000 and a one-month term falling from 5.05% to 4.95%, a decrease of 10 basis points, and other products were also adjusted accordingly. Currently, the bank offers interest rates ranging from 4.4% to 4.95% for four different terms: one month, three months, six months, and one year, depending on the minimum deposit amount.

In addition, Bank of Beijing reduced the one-year US dollar deposit interest rate from 5% to 4.5%, a decrease of 50 basis points. Evergrowing Bank lowered the one-year US dollar deposit interest rate from 5% to 4.9%, a reduction of 10 basis points.

Hu Jie, a professor at the Shanghai Advanced Institute of Finance at Shanghai Jiao Tong University, stated that the reason domestic banks are reducing US dollar deposit interest rates is due to the increasing probability of the Federal Reserve lowering interest rates.

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"The Federal Reserve's benchmark interest rate directly affects the setting of commercial banks' US dollar deposit interest rates," said Ai Yawen, an analyst at Rong360 Digital Technology Research Institute. Banks also consider risk management when setting US dollar deposit interest rates, including the exchange rate risk between the Chinese yuan and the US dollar, credit risk, and liquidity risk.

In fact, as early as July, several banks had already started to lower the interest rates on US dollar deposits. For instance, China Construction Bank reduced the annual interest rate for US dollar deposits with a minimum deposit of over $5,000 for one and two-year terms to 2.8%. CITIC Bank's annual interest rate for US dollar deposits with a minimum deposit of $5,000 for one year is 2.5%, and 2.8% for white-listed customers.

"For white-listed customers, the three-month fixed deposit still offers 4.9% for now, but it may be adjusted in September if the Federal Reserve's interest rate cut materializes," a wealth manager at a city commercial bank told reporters, noting that the bank's three-month US dollar fixed deposit annual interest rate had already been reduced from 5% to 4.9% in early August.

A customer manager at Hang Seng Bank told reporters that for new customers, the annualized interest rate for the three-month US dollar fixed deposit product (with a minimum deposit of $20,000) has been reduced from 5.0% to 4.9%, and the six-month US dollar fixed deposit product (with a minimum deposit of $20,000) has been reduced from 4.7% to 4.5%. A customer manager at Standard Chartered Bank's offline branch in Guangzhou also told reporters that the bank's US dollar fixed deposit interest rates have decreased compared to last month.

It is noteworthy that the interest rates for some banks' US dollar fixed deposit products have inverted, meaning that the longer the term, the lower the annualized interest rate. For example, as shown on the Guangzhou Bank app, the annualized interest rate for six-month US dollar deposits can reach 4.4%, while the annualized interest rate for one-year US dollar deposits is only 2.45%.Expectations of a Fed rate cut may drive a continuous reduction in US dollar deposit rates

Regarding the reasons for domestic banks to lower US dollar deposit rates, Hu Jie stated that the main factor is the increasing probability of the Federal Reserve cutting interest rates. Data shows that in July, the US Consumer Price Index (CPI) rose by 2.9% year-on-year, marking the fourth consecutive month of decline and the first time since March 2021 that it has returned to the "2s". Additionally, on August 21, the Fed released the minutes of the Federal Open Market Committee (FOMC) meeting held on July 30-31, where the "overwhelming majority" of officials believed that a rate cut in September might be more appropriate, with at least one more rate cut expected later and further monetary policy easing anticipated for the following year. On the same day, the US non-farm data experienced the largest annual revision in fifteen years—818,000 people. These two significant events directly led to a significant increase in market expectations for the magnitude of the rate cut in September. According to the CME "FedWatch", the probability of a 25 basis point rate cut by the Fed in September is 64%, and the probability of a 50 basis point cut is 36%. The probability of the Fed cutting rates by 50 basis points by November is 31.8%, by 75 basis points is 50.1%, and by 100 basis points is 18.1%. Barring any surprises, the Fed should begin cutting rates in September, with Hu Jie expecting a 25 basis point decrease. Subsequently, the US will initiate an entire rate-cutting cycle, returning to the conventional benchmark rate below 2% within 1 to 2 years.

Although many foreign banks and smaller banks still offer US dollar deposit products with interest rates above 5%, it is foreseeable that the reduction of US dollar deposit rates by domestic banks will become a major trend. Since the US dollar deposit rate is definitely linked to the benchmark rate of the US dollar, given the current cyclical changes in the US dollar, the existence of US dollar deposit rates above 5% is already on a countdown.

The situation of a rate cut is quite certain, but there is still uncertainty about the exact magnitude of the first rate cut—whether it will be 25 basis points or 50 basis points. According to data from the Chicago Mercantile Exchange's FedWatch tool, the probability of a 25 basis point rate cut in September is 65.5%, while the probability of a 50 basis point cut is 34.5%.

As the rate-cutting cycle begins, the US dollar also starts to weaken. The US dollar index fluctuates lower, and the exchange rates of non-US currencies such as the Chinese yuan rebound. As of the time of the journalist's writing, the US dollar index is fluctuating around 100, and the Chinese yuan against the US dollar is fluctuating around 7.12.

"The Federal Reserve's benchmark rate directly affects the setting of US dollar deposit rates by commercial banks," Ai Yawen mentioned. When setting US dollar deposit rates, banks also consider risk management, including the exchange rate risk between the Chinese yuan and the US dollar, credit risk, and liquidity risk.