Dec 27, 2023: The dollar reached a five-month low on Wednesday, and the euro hit a four-month high as speculation surrounding potential Federal Reserve interest rate cuts grew. However, limited year-end trading activity curbed substantial shifts in the market.
Due to many traders observing the holiday period, trading volumes are expected to remain subdued until the start of the New Year.
The dollar index, gauging the U.S. currency against six peers, declined to 101.41, marking its lowest level since July 28. After consecutive years of notable gains driven by forecasts and actual Fed rate hikes to counter inflation, the index is poised for a 1.9% drop in 2023.
Jens Magnusson, SEB’s chief economist, noted, “Overall, on a global scale, market activity is likely to remain muted. Strong equity markets are expected to persist until the New Year. Barring any geopolitical events, currency markets will likely remain relatively calm in the coming days.”
The recent dollar softness—approaching its second consecutive monthly decline—stems from the market’s anticipation of Fed rate cuts in the upcoming year, diminishing the dollar’s attractiveness.
CME’s FedWatch tool currently indicates an 85% probability of a rate cut commencing in March 2024, with more than 150 basis points of cuts forecasted for the next year.
Expectations of lower rates in the coming year have been bolstered by U.S. data illustrating a moderation in inflation.
