SINGAPORE: The dollar looked set on Friday to end 2023 with a loss, reversing two straight years of gains, dragged by market expectations that the US Federal Reserve could begin easing rates as early as next March.
The greenback stayed broadly on the back foot on the last trading day of the year, with currency moves subdued amid a holiday lull leading up to the New Year.
Since the Fed launched its aggressive rate-hike cycle in early 2022, expectations of how far US 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.
Bruised dollar wobbles as traders eye US rate cuts next 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 US 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 (ECB) and the Bank of England (BoE) 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 US 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 US 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 economic recovery in China.
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