The US dollar index is on course for its steepest weekly decline against major currencies since July, weighed down by increasing prospects of interest rate cuts next year by the US Federal Reserve. Among other major currencies, the euro and pound rose on Friday as the central banks in Europe stuck to their hawkish paths.
The US dollar index, which measures the greenback’s strength against a basket of six currencies, eased by 0.02% to 101.94, not far from the four-month low of 101.76 it touched on Thursday. The index is down nearly 2% and set for its steepest weekly decline since July.
The drop in the greenback comes after the dovish rate pause delivered by the US Fed this week, signaling 75 basis points (bps) rate cuts for 2024, surprising markets. Federal Reserve Chair Jerome Powell said at Wednesday’s meeting that the tightening of monetary policy is likely over citing a faster decline in inflation, with a discussion of cuts coming “into view”.
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The dovish tone by the Fed also led to a drop in US Treasury yields, with US benchmark 10-year yields sinking to their lowest since July on Thursday at 3.885%. They were last at 3.947% in Asian hours.
“The dollar index dropped below 102 and is on course to lose about 2% this week, pressured by the prospect of interest rate cuts from the Fed next year. Markets are now pricing in a 75% chance that the Fed would cut rates in March. Stronger than expected US retail sales and a decline in weekly jobless claims also did little to alter rate cut expectations. Meanwhile, both the ECB and the BOE maintained their policy rates, but pledged to keep them at elevated levels to address inflation,” said Jigar Trivedi, Senior Research Analyst – Currencies & Commodities, Reliance Securities.
While the Fed seemed to be more dovish, the European Central Bank (ECB) and Bank of England took a different path, pushing back against bets on imminent interest rate cuts and reiterating their focus on the fight against inflation.
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This helped lift the euro and pound against the greenback. The euro was at $1.0985, just shy of a two-week high of $1.1009 it touched on Thursday. The currency is up 2% this week, its largest rise since July. Sterling was last at $1.2766, having surged 1.1% and scaling a four-month peak of $1.2793 on Thursday, Reuters reported.
Despite the weakness in the American currency, the Indian rupee remained flat and failed to grasp major gains as reflected in other Asian peers. The USD/INR is stuck in a range of 82.80 – 83.40.
The recent uptick in the domestic retail inflation along with the wholesale price index (WPI) inflation and a spike in local dollar demand by importers have kept the rupee under pressure. A rise in crude oil prices is also weighing on the local unit.
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According to Trivedi, the greenback is expected to touch 101.5 to 101 levels in the coming sessions.
“Likewise, USDINR is expected to touch 83.10 – 83.00 – 82.80 levels in the next week. The outlook for USDINR is bearish since it has touched the lower end of the previous consolidation range,” Trivedi said.
Meanwhile, the Japanese yen strengthened 0.11% to 141.70 per dollar, having surged 0.7% and touched a four-and-a-half month high of 140.95 on Thursday. The Asian currency is up 2% this week and on track for its fifth straight week of gains against the dollar.
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Published: 15 Dec 2023, 02:11 PM IST