U.S. Dollar Faces Significant Monthly Drop Amid Rate Cut Expectations

On Monday, the U.S. dollar experienced a decline against most major currencies, setting the stage for its most substantial monthly drop in a year. This downward trend is attributed to growing speculations that the Federal Reserve could initiate interest rate cuts in the first half of the upcoming year.

The dollar index, a metric assessing the greenback against six major counterparts, registered a 0.1% dip to 103.37, indicating a monthly loss exceeding 3%, marking its weakest performance since November 2022.

Helen Given, an FX trader at Monex USA in Washington, noted that the increased likelihood of earlier rate cuts by the Fed in 2024, compared to the European Central Bank and the Bank of England, is “combining to pressure the dollar today.

Market indicators suggest a roughly 23% chance of the Fed easing monetary policy as early as March, according to the CME Group’s FedWatch Tool. By May, this probability escalates to around 50% during the Fed’s May meeting.

Investors are closely monitoring a range of events and data releases this week, anticipating their impact on the future trajectory of global interest rates. The postponed OPEC+ meeting, the release of the Fed’s preferred inflation gauge – the personal consumption expenditures (PCE) price index, and consumer price data in the euro zone and Australia are key focal points. Additionally, market participants are awaiting a rate decision from the Reserve Bank of New Zealand and Chinese purchasing managers’ index (PMI) data.

The euro remained relatively stable against the dollar at $1.0937, reflecting a monthly gain of approximately 3.4%, on track for its most significant monthly rise in a year. ECB President Christine Lagarde’s comments on easing inflation pressures in the euro zone had little impact on the currency.

Against the yen, the dollar witnessed a 0.4% decrease to 148.885 yen, marking a nearly 2% decline for the U.S. currency in November, its most significant monthly fall since February.

The dollar extended its losses following data revealing a 5.6% drop in U.S. new home sales for October, reaching a seasonally-adjusted annual rate of 679,000 units. The market’s focus is now on Wednesday’s Q3 GDP numbers to gauge the potential for a dollar rebound based on sustained economic growth.

In other currencies, the British pound surged against the weakening dollar to exceed a two-month high of $1.2644. The Australian dollar climbed to a more than three-month high against the greenback at US$0.6614, while the New Zealand currency rose 0.2% to US$0.6091 ahead of the RBNZ interest rate decision on Wednesday, where no change is anticipated.

In China, the yuan retreated after the official midpoint ended five consecutive sessions of strengthening, with the onshore yuan settling at 7.1528 per dollar. Its offshore counterpart dropped 0.2% to 7.1623 per dollar.

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