US dollar saw a marginal rise on the last trading day of 2023, but remained poised to end the year lower, ending a two-year winning streak. This reversal was influenced by prevailing market sentiment that the US Federal Reserve may start interest rate cuts as early as March. On the final day of the year, the dollar rose slightly, but currency movements were generally weak amid the lull of the holiday leading up to the new year.
The dollar’s trajectory has been heavily influenced by expectations regarding the extent of US interest rate increases since the Fed embarked on a strong rate hike cycle in early 2022. However, as subsequent economic data pointed to slowing inflation in the US, investors’ attention shifted towards the likely timing of a rate cut, gaining momentum after a cautious shift at the central bank’s monetary policy meeting in December.
Against a basket of currencies, the dollar rose 0.12% on Friday, to 101.35, rebounding from a five-month low of 100.61 hit in the previous session. The dollar index is still on track to record a loss of more than 2% for both the month and the year.
Markets are looking to cut interest rates early in the US and are less confident that the ECB will cut interest rates so quickly, which is why the dollar is so weak.” “Entering 2024, a soft dollar will be the subject of central bank meetings in March.
A weaker dollar has provided relief to other currencies, with the euro hovering slightly below a five-month high and on track for gains of more than 3% this year. Sterling was poised for a 5% annual gain, recording its best performance since 2017. The pound fell slightly during the day.
US dollar falls, European Central Bank and Bank of England consider cutting interest rates
US dollar continues its downtrend, reaching a multi-week low, driven by market expectations of an imminent rate cut by the Federal Reserve, possibly in March. Lower Treasury yields are having a greater impact on the dollar.
In the coming weeks, the dollar may continue its decline as traders closely monitor new data releases and assess their impact on monetary policy expectations.
By taking advantage of a weaker dollar, the euro and the pound are gaining strength. However, the deterioration of the European economy, especially with recession risks in countries such as Germany, may prompt the ECB to reassess its current policy at the next meeting. Market sentiment is tilted towards an early rate cut by the ECB due to economic indicators that such a move is necessary. In the UK, recent data pointing to economic contraction and low inflation could push the Bank of England toward lower interest rates. Rattterman points out that if inflation continues to fall and economic conditions worsen, the Bank of England may be forced to take urgent action.
The Japanese yen is rising against the dollar, buoyed by market speculation that the Bank of Japan may soon revise its policy stance. Rattterman notes that Japan continues to experience inflation that consistently exceeds the Bank of Japan’s 2% target.
While ECB and Bank of England policymakers did not point to immediate rate cuts at their recent meetings, traders continue to speculate that the Fed’s pivot and the prospect of a US interest rate cut next year could prompt other major central banks to follow suit..
Although it seems that the market may have moved too far and too quickly, the facts suggest that growth is non-existent in Europe, slowing in the US, and inflation is declining globally.
US dollar and year-end reflections: assessing its path and market expectations for 2024
US dollar shows sideways trend as the final trading day of 2023 approaches. Looking at its performance throughout the year, the US dollar has seen a modest 3% year-to-date decline on the US dollar index since the beginning of January. Looking ahead to 2024, the main theme revolves around whether the market expectations for a rate cut by the US Federal Reserve are overly optimistic or whether the Fed has faced challenges and makes mistakes in politics.
On the economic front, traders can take potential profits with the upcoming Chicago Purchasing Managers’ Index (PMI) released on Friday, following Thursday’s jobless claims figures that led to a slight shift in the DXY. If Friday’s PMI figures beat expectations and remain above 50, the dollar could regain some of its recent losses from this week.
There is a noticeable shift in the trajectory of the US dollar index. For traders who have previously engaged in selling the US dollar and are looking forward to opportunities in the current rally, time is running out. The expected dollar strength is likely to prevail on this last day of the year as traders aim to boost demand for the currency, close their positions and start the new year with a fresh start.
The initial resistance is on the upper side around 101.78, which features the lowest price on December 21. While there is still a significant distance ahead, the possibility of the US dollar index testing the bearish trend line near 103.00 does not seem unlikely. The 200-day SMA, a strong final resistance, is hovering near 103.45, and depends on the catalyst pushing the US dollar higher.
US Dollar Falls in December: Fed Rate Cut Signals
US dollar is lowering as December 2023 draws to a close, with the dollar emerging as the weakest performer of the month. The ongoing sell-off is largely due to the Fed’s indication that interest rate cuts totaling 75 basis points may be implemented next year, as evidenced by the latest economic outlook. This unexpected shift towards looser monetary policy had a significant impact on financial markets, pushing the Dow Jones to record highs and bringing the S&P 500 closer to peak.
The market’s response to the Fed’s policy adjustment has been remarkably firm. Traders predicted an 88% probability of a 25 basis point rate cut as early as March. Looking at the whole of 2024, there is a strong consensus, with a probability of more than 80%, that the federal funds rate could fall to the range of 3.75-4.00%, a significant drop from the current rate of 5.25-5.50%. The rationale behind such aggressive market expectations is that a recession in the US is expected next year, a scenario that some analysts consider increasingly likely.
However, it is important to acknowledge that the Fed does not act in isolation. Markets also expect the European Central Bank and the Bank of England to cut interest rates sometime next year. Despite the efforts of officials at both institutions to resist these market expectations, their messages have largely gone unheard. For December, the pound sterling and the euro emerged as the second and third weakest currencies respectively.
