The US dollar reached a five-month low against the euro and a basket of currencies, driven by expectations that the Federal Reserve might consider cutting interest rates. The dollar index, which measures the US currency against six others, fell by 0.48% to 100.98, marking its lowest level since July 27. Despite reduced trading activity during the holiday season, the dollar is poised for a 2.45% drop in 2023, a departure from two years of robust gains prompted by anticipated and actual interest rate hikes by the Fed to counter inflation.
The Federal Reserve is currently perceived as adopting a dovish stance relative to other major central banks, leading to market expectations of potential rate cuts. This shift in sentiment followed Fed Chairman Jerome Powell’s unexpected expression of a dovish outlook at the central bank’s December meeting. Policymakers projected a 75-basis-point easing in 2024. In contrast, central banks like the European Central Bank (ECB) have maintained a “higher for longer” stance, while the Bank of Japan has hinted at a potential end to its negative rate policy.
The euro rose by 0.54% to $1.1102, reaching its highest level since July 27. For the year, the single currency is set to gain 3.61%. Similarly, the British pound increased by 0.56% to $1.2793, reaching $1.2802 earlier in the session, its highest since August 10. Sterling is on track for a 5.79% return in 2023.
The Japanese yen experienced a 0.35% decline against the dollar to 141.89, but the dollar is set for an 8.22% gain for the year. The Bank of Japan recently announced a reduction in the amount of bonds purchased in the January-March quarter, emphasizing the need to maintain the current policy while hinting at future discussions on an exit from massive stimulus.
Meanwhile, the Australian and New Zealand dollars reached more than five-month highs during the session, with the Australian dollar rising by 0.21% to $0.6841, and the kiwi gaining 0.10% at $0.6335.
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