The dollar index reached its lowest level in over two months on Monday as the market anticipates that the U.S. Federal Reserve has concluded its cycle of interest rate hikes and is now considering rate cuts. Last week, the dollar index experienced a nearly 2% drop, the largest weekly decrease since mid-July. This downward trend continued as investors became increasingly convinced that additional rate hikes by the Fed are unlikely.
Recent economic data has indicated a slowdown in the U.S. economy and inflation pressures, but not to the extent of raising concerns about an imminent recession. According to the Conference Board’s October leading economic indicator, there was a slight decrease of 0.8% which fell below estimates predicting a 0.7% decline.
The upcoming Thanksgiving Day holiday in the U.S. has resulted in a relatively light economic calendar for the week. Market participants are now focused on determining when the Fed may initiate rate cuts. Currently, there is a greater than 50% probability of at least a 25 basis points rate cut by May, as indicated by CME’s FedWatch Tool.
The dollar’s gradual weakening can be attributed to the Fed’s efforts to maintain interest rates rather than strengthen the currency itself. Joseph Trevisani, a senior analyst at FXStreet.com, stated that although the market is convinced that the Fed has finished raising rates, the central bank has not explicitly confirmed this sentiment.
To gain insights into the Fed’s policy direction, investors are eagerly awaiting speeches by Federal Reserve Bank of Richmond President Thomas Barkin and the release of minutes from the Fed’s latest meeting on Tuesday. These events will be closely scrutinized for any indications about the future path of the central bank’s policies.
Amidst a weaker dollar, the euro rose to its highest level since August, and the yen strengthened to a 6-1/2-week high against the dollar. The euro’s strength can be attributed to expectations that the European Central Bank (ECB) will continue its rate hike cycle after the Fed has completed its own. Additionally, credit rating agency Moody’s unexpectedly upgraded the outlook on Italy’s ‘Baa3’ sovereign rating to stable and raised Portugal’s rating by two notches to ‘A3’.
As of now, the greenback remains under pressure, with the British pound also making gains against the dollar and reaching a two-month high.
Q: Why did the dollar index reach a two-month low?
A: The market believes that the U.S. Federal Reserve has finished raising interest rates and may now consider rate cuts.
Q: Why has the dollar been weakening?
A: The dollar’s gradual weakening is primarily due to the Fed’s focus on maintaining interest rates rather than strengthening the currency.
Q: What is the expectation for future rate cuts?
A: There is currently a greater than 50% chance of at least a 25 basis points rate cut by May, according to CME’s FedWatch Tool.
Q: What events are investors looking forward to for insights on the Fed’s policy direction?
A: Investors are awaiting speeches by Federal Reserve Bank of Richmond President Thomas Barkin and the release of minutes from the Fed’s latest meeting on Tuesday.
Q: Why did the euro and yen strengthen against the dollar?
A: The euro’s strength can be attributed to expectations that the European Central Bank will continue its rate hike cycle after the Fed has completed its own. Additionally, credit rating agency Moody’s upgraded Italy’s sovereign rating outlook and raised Portugal’s rating.