The dollar index is on course for a 2.6% drop this year, snapping two successive years of strong gains
The dollar dropped across the board on Thursday with the Japanese yen, euro, and pound all at their strongest against the greenback in five months as bets the Fed will cut rates sharply next year continued to drive markets.
The dollar index dropped to a new five-month low of 100.76. The index is on course for a 2.6% drop this year, snapping two successive years of strong gains.
With little news to trade over the holidays, markets have just continued doing what they were doing earlier – taking Treasury yields down, equities higher – and in effect pricing the kindest of soft landings that has consequently seen the dollar continue to sell-off, said Nick Rees, FX analyst at Monex Europe.
The day’s bigger mover was the Japanese yen. The dollar declined 0.63% to 140.93 yen, its lowest since July.
Because of moves earlier in the year, however, the dollar is still more than 7% higher on the yen this year. Public broadcaster NHK reported on Wednesday 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.
Markets are pricing in an 88% possibility of a U.S. rate cut in March 2024, as per CME FedWatch tool. Futures imply more than 150 bps of Fed easing next year, though the route to that may be bumpy.
Markets are now looking for over six full rate cuts from the Fed and no U.S. recession, which seems optimistic to us, said Rees.
He added: Though we could finally end up there, it would be very surprising if we did not see at least some hiccups in the process that are not currently priced in, something which should see the dollar snap back when markets pick up again in January.
