The dollar remained under pressure on Wednesday and the euro was close to a four-month peak, as expectations that the Federal Reserve would soon cut interest rates took hold in the market, with thin year-end flows keeping movements limited.
With many traders out for holidays, volumes are likely to be
muted until the New Year.
The dollar index , which measures the U.S. currency against
six rivals, was at 101.47, just shy of the five-month low of 101.42 it touched
last week. The index is on course for a 1.9% drop in 2023 after two straight
years of strong gains, driven by first the anticipation of and then the actual
hiking of rates by the Fed to battle inflation.
"With little to speak of on the economic calendar for
this week between global holidays, we do not expect a large swing in pricing to
wrap up this calendar year," analysts at Monex USA said in a note.
The recent weakness in the dollar - the index is set to
clock a second straight month of losses - has been the result of the markets
anticipating rate cuts from the Fed next year, denting the appeal of the
greenback.
Markets are now pricing in a 79% chance of a rate cut
starting in March 2024, according to CME FedWatch tool, with over 150 basis
points of cuts priced in for next year.
Data showing cooling inflation has emboldened bets of easing
next year.
"Disinflation is proving entrenched (and) expectations
are for central banks to pivot next year while growth is still trudging
along," said Christopher Wong, a currency strategist at OCBC in Singapore.
"This paints a goldilocks market that is favourable for
risk proxies."
The Australian dollar and the New Zealand dollar both
touched a fresh five-month peak earlier in the session. The Aussie last bought
$0.6828, while the kiwi was at $0.6333.
Meanwhile, the euro was down 0.04% at $1.10385, having
touched a four-month high of $1.1045 on Tuesday. The single currency is up
nearly 3% in the year and is on course for a third straight month of gains,
matching the run it had last year.
The Japanese yen weakened 0.14% to 142.58 per dollar and is
headed for an 8% drop in the year although the Asian currency has witnessed a
bout of strength in recent weeks as traders wager that the Bank of Japan will
soon exit its ultra-loose policy.
A summary of opinions at the central bank's Dec. 18-19
meeting showed that BOJ policymakers saw the need to maintain its ultra-easy
monetary policy for now, with some calling for a deeper debate on a future exit
from massive stimulus.
The summary of opinions was somewhat dovish and showed no
sense of urgency to end the ultra-loose policies, according to Saxo
strategists.
The likely timing of the end of the policies will be later
than what the market is anticipating, the Saxo strategists said in a note. -Reuters