Bruised dollar wobbles as traders eye US rate cuts next year
By Ankur Banerjee
SINGAPORE (Reuters) — The dollar nursed steep losses on Thursday and was headed for a yearly decline after two years of strong gains as expectations of interest rate cuts from the Federal Reserve next year grip markets.
With the year coming to a close, thin liquidity and limited moves are expected until the New Year.
The dollar index, which measures the U.S. currency against six rivals, fell to a fresh five month low of 100.81. The index fell 0.5% on Wednesday and is on course for a 2.6% decline this year, snapping two straight years of strong gains.
Investor focus remains on the timing of the interest rate cuts from the Fed, with markets pricing in a 89% chance of a cut in March 2024, according to CME FedWatch tool. Futures imply as much as 158 basis points of Fed easing next year.
Some analysts though remain unconvinced the U.S. central bank would be so aggressive.
«We still believe that a March policy change toward easing is much too early and there is quite a bit of potential for a dollar rally if and when such action does not materialize,» Monex USA analysts said in a note.
While the Fed took an unexpectedly dovish stance in its December meeting, opening the door to rate cuts next year, other major central banks, including European Central Bank retained their stance of needing to keep rates higher for longer.
Markets though are still pricing in as much as 165 basis points of rate cuts from the ECB next year.
«The European and UK economies are in a much more precarious state and we believe this will force their respective central banks to cut interest rates both before they are fully ready and before the Fed does so,» said the Monex USA analysts, noting the divergence in the outlooks for the U.S.
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