By Amanda Cooper
LONDON (Reuters) — The dollar headed for its biggest weekly drop in five months on Friday as the prospect of rate cuts from the Federal Reserve against a tough line from central banks in Europe on monetary policy fed weekly gains in the euro and the pound.
The Bank of Japan is the last of the major central banks to meet this month and the question among traders and investors is whether or not the BOJ will signal its intention to ditch its policy of keeping interest rates at rock-bottom next week.
In an action-packed week for central banks, traders found more clarity on when interest rate cuts were likely after Federal Reserve Chair Jerome Powell said at Wednesday's meeting that the tightening of monetary policy is likely over, with a discussion of cuts coming «into view».
The divergence between the U.S. and other central banks has set the dollar index on track for a near-2% slide this week — its largest weekly loss since mid-July — and around its lowest in four months. It was last flat on the day at 101.94.
Futures markets show investors are now pricing in a 75% chance of a rate cut in March by the Fed, according to the CME FedWatch tool. At the start of December, there was around a 40% chance of a cut.
Markets expect U.S. rates to fall by 150 basis points by the end of next year, double the Fed's projections that implied 75 basis points of cuts in 2024.
The prospect of such a benign rate environment has ignited a rally across risk assets over the past 24 hours, at the expense of the dollar. But the mood may not last, as the U.S. economy is slowing, while inflation is still above target, analysts said.
«There was an element of surprise — the extent to which the Fed has gone with giving the market what
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