Dollar Set to End 2023 with Loss as Fed Rate Cut Expectations Grow

The dollar appears headed for a year-end decline, breaking its two-year winning streak due to rising speculations that the U.S. Federal Reserve might start cutting interest rates in March 2024. On the last trading day of the year, the dollar remained weak, influenced by a shift in focus from rate hikes to potential rate cuts following signs of cooling inflation. The dollar index was on track to lose over 2% for the month and around 2.2% for the year.

This decline in the dollar brought relief to other currencies, with the euro and sterling showing strength. The possibility of a global trend toward rate cuts in 2024 has triggered a risk-on rally, boosting global equities and pushing up bond prices as yields fall.

The Australian and New Zealand dollars were on track to gain for the month, although their yearly performance was largely unchanged. The Japanese yen was set to fall for the third consecutive year, influenced by the Bank of Japan’s accommodative policy. In contrast, the outlook for the Chinese yuan was less optimistic, facing a yearly loss due to challenges in the post-COVID economic recovery.

The yen’s fall was attributed to the Bank of Japan’s commitment to maintaining loose monetary policies. Despite some calls for a debate on an exit strategy, the central bank remains cautious, citing the risk of inflation running above 2%. The weak yen and accommodative policy were seen as key supports for Japan’s economic outlook in 2024.

In China, the onshore yuan was experiencing a yearly loss, prompting the central bank to announce increased macroeconomic policy adjustments to support the economy amid deflationary pressures. The offshore yuan was also affected, reflecting challenges in the country’s economic recovery.

Overall, the dollar’s potential decline in 2024, coupled with a global trend toward rate cuts, has shaped a dynamic year-end market scenario with implications for various currencies and economies.

This analysis is sourced from Reuters.

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