Expectations for a Federal Reserve rate cut are heating up, causing the US dollar to fall in response, reaching a new low for the year. As concerns about an economic recession ease and risk appetite rebounds, the dollar is under pressure and has declined. The dollar fell 2.2% against a basket of currencies this month to 101.39 points, its lowest level since the first trading day in January.

As the dollar weakens, the S&P 500 stock index has almost recovered all the ground lost since early August, with a marked improvement in market sentiment.

"The market is looking for a soft landing and a Federal Reserve rate cut... which is not good for the dollar," said Athanasios Vamvakidis, head of G10 FX strategy at Bank of America.

Powell is set to speak at the Jackson Hole Symposium on Friday, where he will provide new clues about the future direction of US interest rates.

The question for the rest of the year is: do you want to short the dollar?

Expectations for a rate cut are gradually increasing. After strong retail sales data restored confidence in the economy, the market anticipates the Federal Reserve will cut rates three to four times before the end of the year; following a weak jobs report, traders are now forecasting the Fed will cut rates five times this year. The CME FedWatch Tool shows the likelihood of a 50 basis point rate cut in September has risen from 24% on Monday to 32.5%, with a 67.5% chance of a 25 basis point cut.

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Vamvakidis stated that robust consumer spending, coupled with optimism that the Federal Reserve will cut rates multiple times this year, is "favorable for risk sentiment," but not for the dollar, as "the dollar is still overvalued."

In the first half of this year, the US dollar index rose due to surprise at the resilience of the US economy. However, from the end of June, as the US economic growth slowed, the US dollar index also turned down.

Since then, the pace of the dollar's weakness has accelerated. Citigroup stated that as risk appetite recovers, investors have started to sell the dollar and buy other risk assets, leading to further weakening of the US dollar index.Jane Foley, head of foreign exchange at Rabobank, said: "We expect a mild recession in the U.S.—the economy is definitely slowing and converging with other countries."

She added that the euro, the biggest rival to the U.S. dollar, has been "very resilient" this year, despite weak German manufacturing, and the euro has appreciated 3.6% against the dollar since early July.

Analysts believe that the reason for the dollar's decline is that investors have abandoned the popular "carry trade," which involves borrowing yen to buy higher-yielding dollars, leading to a more than 7% increase in the yen against the dollar over the past month. According to data from the U.S. Commodity Futures Trading Commission, short bets on the yen reached the highest level since 2007 last month, but have plummeted in recent weeks, with the first net long positions since 2001 appearing last week.

"The dollar's positioning is flat, but far from extended—now, the question for the rest of the year is: do you want to be short the dollar?" said Chris Turner, head of research at ING.

"The dollar view has not fully turned, and it may not until we have a clearer picture of the pace and depth of the Fed's easing cycle," said Michael Metcalfe, head of global macro strategy at State Street.