Since the Fed launched its aggressive rate-hike cycle in early 2022, expectations of how far U.S. rates would have to rise have been a huge driver of the dollar for the most part of the past two years.
But as economic data subsequently pointed to signs that inflation in the United States is cooling, investors turned their focus to how soon the Fed could begin cutting rates — expectations which gathered steam after a dovish tilt at the central bank’s December policy meeting.
Against a basket of currencies, the greenback fell 0.02% to 101.18, languishing near a five-month trough of 100.61 hit in the previous session.
The dollar index was on track to lose more than 2% for the month and roughly 2.2% for the year.
“The dollar is likely to come under pressure in 2024 as (the) Fed formally signals a dovish pivot, but we need to see how growth outside the U.S. transcends,” said Charu Chanana, head of FX strategy at Saxo.
A weakening dollar meanwhile brought relief to other currencies, with the euro last at $1.1076, hovering near a five-month peak, and on track to rise more than 3% for the year.
Sterling was similarly on track for a 5% yearly gain, its best performance since 2017. The British pound was last 0.04% higher at $1.2740.
While policymakers at the European Central Bank and the Bank of England did not signal any imminent rate cuts at their policy meetings this month, traders continue to bet that a Fed pivot and the prospect of lower U.S. rates next year would give room for other major central banks to follow suit.
“We believe central banks in the advanced economies are on pace to pull forward the timing of pivoting to interest rate cuts,” said economists at Wells Fargo in their 2024 outlook.
“As far as the outlook for G10 central banks, the ‘higher for longer’ stance that many institutions adopted in 2023 is becoming less of a priority.”
All in, the prospect that 2024 could be a year where major central banks begin easing rates have sparked a risk-on rally, sending global equities higher.
Global bonds have likewise marched higher, after being battered for the most part of the past two years as interest rates rise. The benchmark 10-year U.S. Treasury yield was last at 3.8387%, having fallen nearly 120 basis points from its 16-year high of 5.021% hit in October.
Yields fall when bond prices rise.
The risk-sensitive Australian and New Zealand dollars were on track to gain 3.5% and 3% for the month, respectively, though were largely unchanged for the year.
The Aussie, which was last 0.14% higher at $0.68385, looked set to eke out a marginal yearly gain of 0.3%. The kiwi was on track to lose 0.2% for the year.
Both currencies, often used as liquid proxies for the Chinese yuan, have come under pressure as a result of an underwhelming post-Covid-19 economic recovery in China.
The yen was meanwhile set to fall more than 7% in 2023, extending into a third straight year of losses, as the Japanese currency continues to come under pressure as a result of the Bank of Japan’s, or BOJ, ultra-loose monetary policy stance.
While market expectations are for the BOJ to exit negative interest rates in 2024, the central bank continues to stand by its dovish stance and has provided little clues on if, and how, such a scenario could play out.
BOJ Governor Kazuo Ueda said he was in no rush to unwind ultra-loose monetary policy as the risk of inflation running well above 2% and accelerating was small, public broadcaster NHK reported on Wednesday.
A summary of opinions from the BOJ’s policy meeting this month showed some policymakers called for deeper debate on a future exit from ultra-loose monetary policy as the economy makes progress toward achieving the bank’s price target.
“The outlook for Japan is encouraging going into 2024, with expectations of robust economic growth and improving inflation that shows signs of being sustainable,” said Aadish Kumar, international economist at T. Rowe Price, citing a weak currency and accommodative policy stance as “key supports” to the view.
“Any potential moves to tighten policy via a hike in interest rates represent a key risk to the outlook. Given the BOJ will not want to risk undoing all the good work achieved to date, we believe it will remain dovish in its communication and keep policy accommodative.”
The yen was last steady at 141.45 per dollar.
In China, the onshore yuan was headed for a yearly loss of nearly 3%, pressured by a faltering post-Covid recovery in the world’s second-largest economy.
The country’s central bank said on Thursday it would step up macroeconomic policy adjustments to support the economy and promote a rebound in prices, amid signs of rising deflationary pressures.
The yuan last stood at 7.0925 per dollar, while its offshore counterpart was last at 7.0898 per dollar.
