Dollar Drops As Rate Cut Hopes Rise

A renewal in rate cut expectations from the Federal Reserve caused the U.S. Dollar to weaken against major currencies during the past week. Softer economic data from the U.S. and further signals from Fed officials supporting additional easing added to the rate cut optimism.

During the past week, the U.S. dollar inter alia declined against the euro, the British pound, the Australian Dollar, the Japanese yen, the Canadian dollar, the Swedish krona as well as the Swiss franc. As a result, the Dollar Index which measures the Dollar’s strength against a basket of 6 currencies also dropped close to a percent.

The FOMC, when it meets on December 10 will have to potentially choose between another interest rate cut to support the labor market or maintain status quo to guard against inflationary pressures.

Despite the recent FOMC minutes indicating a divided Fed, dovish comments from Fed officials and indications of weakness in the economy have lifted rate cut expectations over the past 1 week. According to the CME FedWatch tool, market expectation of a quarter percentage Fed rate cut in December increased to 86.4 percent by Friday, from 84.4 percent on Monday.

Data released on Tuesday had revealed a lower-than-expected level of retail sales and core producer price inflation in the month of September. Markets also speculated on the likelihood of a dovish candidate being considered to succeed Fed Chair Jerome Powell. With markets expecting policymakers to prioritize a weakening labor market over sticky inflation, rate cut expectations strengthened.

During the past week, the Dollar Index slipped from the weekly high of 100.30 recorded on Monday to the weekly low of 99.38 on Friday. The index eventually closed the week’s trading at 99.44, implying a decline of 0.74 percent from the level of 100.18 on November 21.

Amidst the dollar’s weakness attributed to strong rate cut hopes and the euro’s strength driven by prospects of peace in Ukraine, the EUR/USD pair rallied 0.72 percent during the week ended November 28. From the weekly low of 1.1502 touched on Monday, the pair climbed to a high of 1.1614 on Thursday. The pair eventually closed at 1.1596, versus 1.1513 a week earlier.

The British pound also surged against the greenback during the week ended November 28 amidst strong Fed rate cut hopes and the U.K. budget announcements proposing new taxes to support welfare programs. The GBP/USD pair which had closed at 1.3098 on November 21 gained 1.1 percent during the week ended November 28 to close at 1.3238. The weekly trading range was wider, between a low of 1.3079 recorded on Monday and a high of 1.3270 recorded on Thursday.

The Australian Dollar jumped 1.5 percent against the U.S. Dollar during the past week, amidst a higher-than-expected annual inflation update. The pair surged from the level of 0.6456 recorded on November 21 to close the week ended November 28 at 0.6550. During the week, the pair oscillated between a low of 0.6436 recorded on Tuesday and the high of 0.6561 recorded on Friday.

The U.S. Dollar declined against the Japanese Yen during the week ended November 28 amidst data showing a spike in unemployment rate, industrial production as well as retail sales. The USD/JPY pair closed the week at 156.18 versus 156.39 a week earlier, registering a decline of 0.13 percent. The pair ranged between the high of 157.20 recorded on Monday and the low of 155.64 recorded on Wednesday.

Amidst a further strengthening in Fed rate cut expectations to 87.6 percent from 86.4 percent on Friday, the 6-currency Dollar Index has declined further. It is currently trading at 99.23 versus 99.44 at close on Friday.

The EUR/USD pair has rallied to 1.1626 versus 1.1596 on Friday. The GBP/USD pair has decreased to 1.3230 from 1.3238 on Friday. The AUD/USD pair is currently at 0.6553 versus 0.6550 at close on Friday. The USD/JPY pair has weakened to 155.14 from the level of 156.18 recorded at the end of the previous week as Bank of Japan hinted at rate hikes.

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