NEW YORK,- The dollar slipped to a five-month low against the euro and a basket of currencies on Wednesday on expectations that the Federal Reserve could soon cut interest rates.
But with many traders out for holidays volumes are likely to remain muted until the New Year.
The dollar index , which measures the U.S. currency against six others, fell 0.37% to 101.09, its lowest level since July 27. The index is on course for a 2.32% drop in 2023 after two years of strong gains driven by the anticipation of Fed rate rises and then the Fed’s actual rate increases to battle inflation.
The Fed is now viewed as being dovish relative to other major central banks. Pricing for a rate cut in March increased after Fed Chairman Jerome Powell was unexpectedly dovish at the U.S. central bank’s December meeting, when policymakers projected 75 basis points in easing in 2024.
Other central banks including the European Central Bank (ECB) have maintained a higher for longer stance. The Bank of Japan, meanwhile, has indicated that it is closer to ending its negative rate policy even as it also maintains it is in no rush to make a change.
”Japan is going to finally come off of their extreme low policy within the next couple of months at least and also the ECB is sounding a little more hawkish than the Fed’s newfound dovishness,” said Lou Brien, market strategist at DRW Trading in Chicago.
Key to the U.S. outlook will be what prompts rate cuts. If inflation falls much faster than the Fed’s benchmark rate it can tighten monetary conditions more than Fed policymakers intend.
“If the Fed cuts rates because inflation has come so far down that they don’t want policy to unintentionally tighten … then that’s probably a good scenario,” said Brien.
If they cut because of a weakening economy, however, “then the history is kind of harsh” for the economy and the stock market. “The motivation behind the rate cuts is still unknown and is going to be the most important factor,” Brien added.
The euro gained 0.54% to $1.1103, the highest since July 27. The single currency is on track to gain 3.61% this year.
The dollar rose 0.16% to 142.64 Japanese yen and is headed for an 8.78% gain this year.
The Bank of Japan on Wednesday said it would reduce the amount of bonds it buys in its regular operations in the January-March quarter.
A summary of opinions at the Bank of Japan’s Dec. 18-19 meeting also showed that BOJ policymakers saw the need to maintain policy for now, with some calling for a deeper debate on a future exit from massive stimulus.
The Australian dollar and the New Zealand dollar both touched more than five-month peaks earlier in the session. The Aussie last up 0.23% at $0.6840, while the kiwi gained 0.09% to $0.6332.
Bitcoin rose 0.80% to $42,851.