The dollar remained under pressure today, Wednesday, while the euro is approaching its highest level in four months. This is in light of expectations that the U.S. Federal Reserve will cut interest rates soon and weak year-end flows. As traders head out for holidays globally leading into the new year, the shortened week will likely see weak volumes.
Dollar index declines
The dollar index, which measures the U.S. currency against six competing currencies, reached 101.54. That is close to its lowest level in five months at 101.42 which it touched last week. The index is heading towards a decline of 1.9 percent in 2023 after two consecutive years of strong gains. That is against the backdrop of the Federal Reserve raising interest rates to fight inflation.
The recent weakness in the dollar resulted from markets anticipating interest rate cuts from the Federal Reserve next year which will affect the dollar’s attractiveness. Currently, markets expect a 79 percent chance of interest rate cuts starting in March 2024 with up to 153 basis points of cuts priced in for next year, according to the CME FedWatch tool.
Quiet week
“With little to speak of on the economic calendar for this week between global holidays, we do not expect a large swing in pricing to wrap up this calendar year,” said analysts at Monex USA. “Liquidity across the world will remain quite thin as many offices remain closed, which could give us some choppiness in markets, but largely this week is expected to remain fairly uneventful.”
Meanwhile, the euro fell 0.07 percent to $1.1034, after touching a four-month high of $1.1045 on Tuesday. The single currency has risen about 3 percent this year and is on its way to achieving gains for the third month in a row. Therefore, the euro is matching the rise it achieved last year.
Read: Japanese yen records worst performance among top currencies in 2023
Japanese yen
The Japanese yen fell 0.17 percent to 142.64 per dollar and is on track to fall 8 percent this year. However, the Asian currency has seen a bout of strength in recent weeks as traders bet that the Bank of Japan will soon exit its ultra-loose policy.
A summary of views at the central bank’s meeting on December 18-19 showed that policymakers at the Bank of Japan saw the need to maintain ultra-loose monetary policy for the time being. Some called for a deeper discussion on a future exit from massive stimulus.
Elsewhere, the Australian and New Zealand dollars reached a new five-month peak but fell slightly in early trading. The Australian dollar last bought $0.6822, while the New Zealand dollar reached $0.6321.
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