Dollar remains close to 2-1/2-month lows, relieving yen pressure

22 Nov 2023 , 10:21 AM

After the minutes of the Federal Reserve’s most recent meeting failed to derail market expectations that the Fed’s cycle of monetary tightening was coming to an end, the dollar index hovered around two and a half months’ lows.

According to the Federal Reserve minutes, the bank would move ‘carefully’ and ‘all participants judged it appropriate to maintain’ the existing rate setting.

Fed officials reiterated recent remarks by policymakers that kept the door open for further tightening even as markets have started to price in cuts starting early next year. They agreed that they would only raise interest rates if success in controlling inflation stalled.

According to Matt Simpson, senior market analyst at City Index, ‘the release of the FOMC November minute did little to sway the opinion that the Fed have reached their terminal rate.’

According to CME’s FedWatch Tool, markets are pricing in approximately a 30% possibility of a rate cut as early as March, but they are almost certain that the Fed will hold rates at their December meeting.

The dollar index, which compares the value of the US dollar to a basket of other currencies, remained unchanged at 103.58, close to levels last seen in early September but up from a low of 103.17 set overnight.

The euro hit its highest level versus the dollar since mid-August on Tuesday, hitting $1.0966. It is currently trading at $1.0912.

Near the overnight high of $1.2554, which marked a two-month high, sterling remained essentially unchanged at $1.2534.

‘We’re seeing signs that the dollar bearish move is running out of steam’ and may be ‘due to bounce,’ Simpson stated. The dollar often strengthens and weakens around the time of Thursday’s U.S. Thanksgiving holiday.

The dollar-boosting U.S. Treasury yields have also fallen from multi-year highs reached in October as investors increase their bets that the Fed will stop raising rates in response to a slowing in U.S. inflation that same month.  The overnight decrease in Treasury yields to roughly 4.40% relieved additional pressure on the yen.

The Japanese yen strengthened 0.1% against the US dollar to settle at 148.28, holding onto recent gains after edging higher from as low as 147.155 overnight.

The yen still faces significant challenges, despite expectations that the Bank of Japan may remove its negative interest rate policy early in 2024.

The world’s largest economy is resilient, as evidenced by recent U.S. data, which supports the Fed’s soft landing story.

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