Dollar under pressure on rate cut wagers amid bleak holiday market

The US dollar was under pressure on Wednesday while the European Union’s euro edged a a four month peak on the back of expectations that the Federal Reserve would cut interest rates soon.

With thin year-end flows keeping movements limited and traders out for holidays globally until the New Year, the last week of the year is likely to see muted volumes.

The dollar index, which measures the US currency against Euro, Swiss franc, Japanese yen, Canadian dollar, British pound, and Swedish krona, was at 101.54, nearing a five month low of 101.42 which it already touched last week.

The index is on course for a 1.9 per cent drop in 2023 after two straight years of strong gains on the back of the Fed hiking rates to battle inflation.

The recent weakness in the dollar is due to markets anticipating rate cuts from the Fed next year, denting the appeal of the greenback.

Markets are now pricing in a 79 per cent chance of a rate cut in March 2024 and 153 basis points of cuts priced in for next year, the CME FedWatch tool suggested.

"With little to speak of on the economic calendar for this week between global holidays, we do not expect a large swing in pricing to wrap up this calendar year," said analysts at Monex USA.

Liquidity across the world will remain quite thin as several offices remain closed, which could give us some choppiness in markets, the analysts added, saying that the week is expected to remain “fairly uneventful.”

The euro was down 0.07 per cent to $1.1034, having touched a four month high of $1.1045 on Tuesday.

The currency is up nearly 3 per cent in the year and on course for a third straight month of gains, on the lines of its run last year.

The Japanese yen weakened 0.17 per cent to 142.64 per dollar and is headed for a 8 per cent drop in the year.

The Asian currency has, however, witnessed a bout of strength in recent weeks as traders wager that the Bank of Japan will soon exit its ultra-loose policy.

The Australian dollar and the New Zealand dollar both touched a fresh five month peak but were down a touch in early trading. The Aussie last bought $0.6822, while the kiwi was at $0.6321.

(With Reuters Inputs)