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US dollar slips on Fed rate cut view

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The dollar index dropped 0.2 per cent to 103.20 and was headed for a monthly loss of over 3 per cent, its worst performance since November 2022

The U.S. dollar slipped on Monday, on pace for its biggest monthly decline in a year, weighed down by expectations that the Fed is done hiking interest rates and could start cutting them by the first half of next year.

The dollar index, which measures the currency against six major peers, dropped 0.2 per cent to 103.20 and was headed for a monthly loss of over 3 per cent, its worst performance since November 2022.

Technically, the dollar index did enough damage over the last two weeks to really suggest a breakdown. So the dollar’s heyday is done and we are now looking at a softer dollar, said Amo Sahota, director at FX consulting firm Klarity FX in San Francisco. But we have to be careful here. If you get too aggressive on the softer dollar outlook primarily because you think U.S. rates are going to be cut, the Fed will have something to say about that.

U.S. rate futures on Monday showed a nearly 23 per cent probability that the Fed may start easing monetary policy as early as March, as per the CME Group’s FedWatch Tool. That probability increased to nearly 50 per cent in May.

Investors are also looking to a string of events and data this week that could determine the future path of interest rates globally. A delayed OPEC+ meeting, the release of the PCE price index as well as consumer price data in the euro zone and Australia fill this week’s calendar.

The market is also eyeing a rate decision from the Reserve Bank of New Zealand and Chinese PMI data.

In other currencies, the euro was 0.2 per cent higher against the dollar at $1.0953. On the month, the euro has gained nearly 3.6 per cent, on pace for its biggest monthly increase in a year. The euro showed little reaction to European Central Bank President Christine Lagarde’s comments saying that euro zone inflation pressures are easing but wage growth is still strong, so the ECB’s fight to contain price growth is not yet over.

Against the yen, the dollar dropped 0.6 per cent to 148.59 yen.

The dollar extended losses after data showed U.S. new home sales dropped more than expected in October, declining 5.6 per cent to a seasonally-adjusted annual rate of 679,000 units.

I do not see much potential for a turnaround until later this week when the third quarter GDP numbers are released Wednesday morning, said Helen Given, FX trader, at Monex USA in Washington. If the U.S. economy can show sustained growth, rather than a sudden sharp downturn as some major economists have forecasted, we could see a reversal and some dollar strength to end the month.

Elsewhere, sterling rose to a more than two-month high of $1.2644, extending its gains from last week following data showing British firms unexpectedly reported a marginal return to growth in November following three months of contraction. The pound was 0.2 per cent higher at $1.2628.

In China, the yuan slid after the official midpoint snapped five consecutive sessions of strengthening, with the onshore yuan at 7.1528 per dollar. Its offshore counterpart dropped 0.1 per cent to 7.160 per dollar.

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