US Dollar hits 5-month low against Euro amid hopes of Fed rate cut

The US Dollar slipped to a five-month low against the Euro and a basket of currencies on Wednesday, reflecting market expectations of potential interest rate cuts by the Federal Reserve. The Dollar index, measuring the US currency against six other major currencies, slipped by 0.37 per cent to 101.09, marking its lowest level since July 27. This decline follows a year where the Dollar is on track for a 2.32 per cent drop in 2023, reversing two years of robust gains driven by anticipation and actualisation of Fed rate increases to combat inflation.

The Federal Reserve's current stance is perceived as dovish compared to other major central banks, contributing to increased expectations of a rate cut in March. The dovish sentiment emerged after Fed Chairman Jerome Powell unexpectedly expressed a dovish outlook at the December meeting, where policymakers projected a potential 75 basis points in easing throughout 2024.

While many traders are on holiday, leading to subdued trading volumes, the dynamics of central bank policies are influencing currency markets. The European Central Bank (ECB) and the Bank of Japan are maintaining stances that differ from the Fed's dovish stance. Lou Brien, a market strategist at DRW Trading in Chicago, noted that the ECB appears more hawkish than the Fed's newfound dovishness, and the Bank of Japan is considering moving away from its extreme low policy in the coming months.

The US outlook will depend on the reasons behind potential rate cuts. If the Fed cuts rates due to a rapid decline in inflation, it may unintentionally tighten monetary conditions. However, if the cuts are driven by a weakening economy, it could have harsh implications for the economy and the stock market.

The Euro saw a gain of 0.54 per cent, reaching $1.1103, its highest level since July 27, and is poised to gain 3.61 per cent for the year. Meanwhile, the Dollar rose by 0.16 per cent against the Japanese yen, heading for an 8.78 per cent gain in 2023. The Bank of Japan's announcement on reducing bond purchases in the January-March quarter contributed to these currency movements.

The Australian Dollar and the New Zealand Dollar both reached more than five-month peaks in the session, with the Aussie up 0.23 per cent at $0.6840, and the Kiwi gaining 0.09 per cent to $0.6332. Additionally, Bitcoin experienced a 0.80 per cent rise, reaching $42,851.

As the market awaits further developments, the dynamics of central bank policies, inflation, and economic conditions will continue to shape the trajectory of currency movements in the coming year.

(With Reuters inputs.)