The dollar fell today, Wednesday, to its lowest level in five months, while the euro touched a four-month high amid expectations that the Federal Reserve (U.S. central bank) will soon cut interest rates. However, thin trading at the year's end kept trading volumes limited. This week is likely to see weak trading as traders around the world take holidays until the beginning of the new year.
The dollar index, which measures the performance of the U.S. currency against six competing currencies, dropped to 101.41 points, its lowest level since July 28. The index is heading for a 1.9% decline in 2023 after two consecutive years of strong gains due to the Federal Reserve's interest rate hikes to combat inflation. It is also on track for losses for the second consecutive month.
The recent decline in the dollar is attributed to market expectations of a Federal Reserve interest rate cut next year, which will impact the attractiveness of the U.S. currency. The markets now anticipate an 85% chance of a rate cut starting in March 2024, according to the CME Group's FedWatch tool, and expect a reduction of more than 150 basis points next year.
Meanwhile, the euro rose 0.1% to $1.1053 after reaching a four-month high of $1.1055. The euro has increased nearly 3% during the year and is on track to achieve gains for the third consecutive month, aligned with the rise seen last year.
The Japanese yen fell 0.1% to 142.52 per dollar and is expected to drop 8% for the year despite its strength in recent weeks, as traders bet that the central bank will soon abandon its ultra-easy monetary policy. A summary of the Bank of Japan's policy meeting on December 18-19 indicated that policymakers believe it is necessary to maintain the ultra-easy monetary policy at present, with some calling for deeper discussions about eventually abandoning this policy.
The Australian and New Zealand dollars reached new five-month highs earlier in the session, with the latest trading price for the Australian dollar at $0.6836 and the New Zealand dollar at $0.6324.
