The United States Dollar pulled back slightly on Thursday after hitting a 20-year high on the back of rising interest rates and global demand for haven currencies.
The dollar index rose to 107.05 in the previous session, the highest in 20 years before pulling back to 106.57 at 11:07 am Nigerian time.
Against the Euro common currency, the U.S. Dollar gave back some of its gains on Thursday to trade at 1.0213, up from 1.0173 attained after dropping below 1.0350 support levels.
Similarly, the greenback pared gains against the British Pound to 1.2009 despite over 40 British lawmakers resigning their positions and calling for the resignation of Prime Minister Boris Johnson enmeshed in a series of scandals.
The value of the United States Dollar rose in recent weeks after it became clear that the Federal Reserve won’t be halting its rate increase anytime soon. The surge in demand for the United States Dollar was to avoid paying excessive borrowing costs going forward and also to ensure cash availability going into recession, known cash is king.
The Federal Reserve is expected to raise borrowing costs by another 50 basis points to 75 basis points in the month of July as it continues to battle 40 years high inflation rate of 8.6%.
This persistent increase in borrowing costs is expected to weigh on new job creation, new investment, earnings, and subsequently, drag on consumer spending that over the years has sustained the world’s largest economy.
Overseas orders will start waning American goods become more expensive to holders of foreign currencies. This, Investors King predicted would hurt manufacturing activity.
Dollar Sees Uptick, But November Nears Steepest Monthly Decline in a Year
Dollar Hits Four-Month Low as Rate Cut Speculations Grow
The US dollar extended its decline, reaching the lowest level since early August as swap traders increased bets on a Federal Reserve interest rate cut as early as May.
The Bloomberg Dollar Spot Index registered its fifth consecutive day of losses, reflecting concerns about a potential recession and dovish comments from the Fed that are prompting investors to speculate on a reversal of the central bank’s aggressive tightening cycle.
Global Head of Currency Strategy at Brown Brothers Harriman & Co., Win Thin, emphasized the dollar’s vulnerability, stating, “The dollar remains vulnerable until we see a shift in market expectations for the Fed, and that may be a 2024 story.”
He added, “With the dollar rally stalled, it will take some firm real sector data to challenge the current dovish Fed narrative.”
Amid these developments, the New Zealand dollar led gains among Group-of-10 peers, propelled by the central bank’s warning of potential rate hikes in the coming year.
Simultaneously, the Japanese yen strengthened to a two-month high as concerns about elevated US rates diminished.
The prevailing narrative suggests that unless there is a notable change in market expectations for the Fed, the dollar is likely to remain under pressure, with potential shifts anticipated in 2024.
Dollar Declines Amid Rising Optimism on Fed Rate Cut Prospects
Global Markets React to Growing Confidence in Fed’s Cautious Stance
The dollar faced a fourth consecutive day of decline, setting it on course for its worst month since November last year.
This trend is bolstered by increasing optimism among traders regarding the Federal Reserve’s trajectory toward rate cuts.
The South Korean won and Thai baht led the gains in Asia, with the won experiencing its most significant jump in almost two weeks.
Simultaneously, Treasuries stabilized after a previous rally, with yields on the two-year note, sensitive to the Fed’s rate path, hitting a one-week low.
The market sentiment reflects a broader positive outlook, with Wall Street forecasters becoming more upbeat about the prospects for the coming year.
Improved investor sentiment and reduced expectations of a recession have fueled this optimism, along with the belief that the Fed has completed its rate-hiking cycle, prompting a rally in the S&P 500.
Liz Ann Sonders, Chief Investment Strategist at Charles Schwab, cautioned about the potential consequences of rate cuts, stating, “If the market is right in expecting that rate cuts could start maybe even at the end of the first quarter, in the first half, that would require to some degree a weaker economic and labor market backdrop than what we’re seeing right now.”
Despite the positive market sentiment, concerns about the economic and labor market backdrop persist.
The Bloomberg US Treasury Index has turned positive for the year, reflecting slowing inflation and measured job growth that triggered a rally and sent yields plummeting.
Traders are closely monitoring economic data this week, including the Fed’s preferred measure of underlying inflation.
Also, corporate earnings reports from prominent firms such as Crowdstrike Holdings Inc., Salesforce Inc., and Dell Technologies Inc. will provide insights into the evolving landscape of cybersecurity priorities and corporate expenditure.
The Fed’s expressed concern about inflation persisting above the 3% target adds a layer of complexity to the market’s reaction, as analysts anticipate potential pushback against implied easing and the recent rally in bonds and shares.
As investors navigate through these evolving dynamics, gold remains stable near its highest level since May, supported by lower Treasury yields and expectations of impending Fed interest rate cuts.
Meanwhile, oil prices extend their decline as the market weighs the possibility of deeper output cuts from OPEC+ against signs of supply outpacing demand.
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