The dollar is under pressure as the Fed's dovish turn weighs

15 Dec 2023 , 09:29 AM

The increased likelihood of interest rate reduction in the United States next year caused the dollar to linger at four-month lows on Friday, while the euro and pound found support as their respective central banks reaffirmed the need for rates to remain higher for longer.

In a week full of action for central banks, Federal Reserve Chair Jerome Powell’s statement at Wednesday’s meeting that the tightening of monetary policy is likely finished and that a discussion of rate cuts is coming ‘into view’ gave traders greater clarity on when cuts were likely to occur.

According to the Fed’s predictions, there will be 75 basis points of cuts from the current level next year.

As a result, the dollar has declined significantly compared to its competitors. The dollar index is currently at 102.05, not too far from the four-month low of 101.76 that it reached on Thursday. With a 1.9% fall, the index is headed for its worst weekly decline since July.

The euro and pound gained on Thursday as the Bank of England and the European Central Bank reaffirmed their commitment to combating inflation and resisted bets on impending interest rate cuts.

The euro was trading at $1.0983, not far from its two-week high of $1.1009, which it reached on Thursday. This week, the single currency has increased by 2%, the most in the last four weeks.

After rising 1.1% and reaching a four-month high of $1.2793 on Thursday, sterling was last trading at $1.2752, down 0.11% for the day.

According to the CME FedWatch tool, markets are currently pricing in a 75% chance of a rate drop by the Fed in March. Additionally, they are factoring in rate reductions of 150 basis points by December 2024.

Ahead of the Bank of Japan meeting next week, the Japanese yen rose 0.7% and reached a four-and-a-half month high on Thursday. However, in Asian hours, the currency lost 0.20% of its value against the dollar.

With a 2% advance this week, the Asian currency is headed for its largest weekly gain against the US dollar since July.

The BOJ is expected to finish the year as one of the world’s most dovish central banks, dashed hopes that it will abandon its extremely loose monetary policy.

When Governor Kazuo Ueda gives his post-meeting briefing, the market will be watching for any clues he may give over when to stop negative interest rates.

Meanwhile, the New Zealand dollar decreased 0.03% to $0.620 and the Australian dollar increased 0.06% to $0.670.

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