(Updated at 1000 EST)
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 =USD , 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 EUR=EBS 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 JPY=EBS 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 AUD=D3 and the New Zealand dollar NZD=D3 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 BTC=BTSP rose 0.80% to $42,851.
======================================================== Currency bid prices at 10:00AM (1500 GMT)Description RIC Last U.S. Close Pct Change YTD Pct High Bid Low Bid Previous Change Session Dollar index =USD 101.0900 101.4700 -0.37% -2.319% +101.5700 +101.0700 Euro/Dollar EUR=EBS $1.1103 $1.1043 +0.54% +3.61% +$1.1106 +$1.1029 Dollar/Yen JPY=EBS 142.6350 142.3900 +0.16% +8.78% +142.8400 +142.3100 Euro/Yen EURJPY= 158.35 157.23 +0.71% +12.87% +158.3600 +157.1600 Dollar/Swiss CHF=EBS 0.8502 0.8537 -0.40% -8.05% +0.8548 +0.8500 Sterling/Dollar GBP=D3 $1.2768 $1.2723 +0.35% +5.58% +$1.2778 +$1.2699 Dollar/Canadian CAD=D3 1.3197 1.3195 +0.02% -2.59% +1.3210 +1.3177 Aussie/Dollar AUD=D3 $0.6840 $0.6825 +0.23% +0.36% +$0.6844 +$0.6818 Euro/Swiss EURCHF= 0.9437 0.9424 +0.14% -4.63% +0.9444 +0.9414 Euro/Sterling EURGBP= 0.8693 0.8672 +0.24% -1.71% +0.8697 +0.8668 NZ NZD=D3 $0.6332 $0.6329 +0.09% -0.24% +$0.6336 +$0.6318 Dollar/DollarDollar/Norway NOK=D3 10.1030 10.1500 -0.17% +3.25% +10.1770 +10.1230 Euro/Norway EURNOK= 11.2130 11.2034 +0.09% +6.85% +11.2468 +11.1801 Dollar/Sweden SEK= 9.9726 9.9953 +0.37% -4.18% +10.0180 +9.9628 Euro/Sweden EURSEK= 11.0740 11.0337 +0.37% -0.68% +11.0942 +11.0109 <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ World FX rates https://tmsnrt.rs/2RBWI5E^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
