Dollar on Guard as Investors Deliberate on US Interest Rate Prospects

Dollar on Guard as Investors Deliberate on US Interest Rate Prospects

On Friday, the dollar found itself in a state of restraint, grappling with uncertainty regarding the trajectory of U.S. interest rates. Concurrently, the euro maintained its overnight gains, buoyed by data suggesting a potential alleviation of the economic downturn in the eurozone.

The backdrop of U.S. markets being closed on Thursday, coupled with a truncated trading session on Friday in observance of Thanksgiving, sets the stage for currencies to navigate narrow pathways. Despite the anticipated thin liquidity, some volatility is expected to persist during this period.

The dollar index, a gauge of the U.S. currency against six major counterparts, experienced a marginal decline of 0.029%, settling at 103.73. This puts it in proximity to the recent two-and-a-half-month low of 103.17 reached earlier in the week.

For the month, the index has recorded a 2.8% descent, marking its most pronounced monthly decline in a year. This trend aligns with growing sentiments that the Federal Reserve has concluded its cycle of interest rate hikes, with indications pointing toward potential rate cuts in the coming year.

Market expectations for Federal Reserve rate cuts in 2024 have slightly receded, as per CME Group’s FedWatch tool. The current futures data indicates a 26% probability of the Fed reducing its target rate during the March 2024 policy meeting, a slight decrease from the 33% chance recorded the previous week.

Meanwhile, the euro is positioned at $1.0904, reflecting a 0.16% increase overnight. This uptick follows a set of preliminary surveys suggesting that the economic downturn in Germany might not be as severe as initially anticipated, countering concerns in the market.

In October, Japan observed a modest uptick in core consumer price growth, rebounding from a slight easing in the previous month. This development is reinforcing investors’ beliefs that persistent inflationary pressures might compel the Bank of Japan (BOJ) to consider scaling back monetary stimulus in the near future.

Economists at ING have expressed the anticipation that the BOJ will transition away from its highly accommodative stance in the upcoming year. This shift suggests a potential adjustment in the central bank’s policy approach in response to the evolving economic landscape.

The Japanese yen demonstrated a 0.04% strengthening, reaching 149.49 per dollar. This uptick marks a gradual recovery from the nearly 33-year low of 151.92 recorded at the beginning of the previous week, with the yen showing a 1.5% gain for the month.

Recent economic indicators from Japan reveal that factory activity contracted for the sixth consecutive month in November. Concurrently, modest growth in the service sector remained relatively unchanged. This business survey, released on Friday, underscores the delicate state of the economy amid subdued demand and inflationary pressures.

In the currency markets, the British pound was last quoted at $1.2539, marking a 0.05% increase.

The Australian dollar experienced a 0.14% increase, reaching $0.657, while the New Zealand dollar, also known as the kiwi, rose by 0.07%, reaching $0.605.

In the Asian trading session following Japan’s holiday on Thursday, Cash Treasuries resumed activity. The yield on 10-year Treasury notes observed a 2.9 basis points increase, reaching 4.445%. Simultaneously, the yield on the 30-year Treasury bond rose by 2.8 basis points, reaching 4.576%. These movements indicate shifts in the fixed-income market as investors respond to various economic factors and expectations.

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