© Reuters. FILE PHOTO: Four thousand U.S. dollars are counted out by a banker counting currency at a bank in Westminster, Colorado November 3, 2009. REUTERS/Rick Wilking/File Photo
By Karen Brettell and Samuel Indyk
NEW YORK/LONDON (Reuters) – The dollar is on track to end 2023 with its first yearly loss since 2020 against the euro and a basket of currencies, as expectations grow for the U.S. Federal Reserve to begin cutting rates next year.
There are many questions surrounding 2024, such as when the Fed will begin to make cuts and whether the first rate reduction will be to prevent over-tightening as inflation drops or due to rapidly slowing U.S. economic growth.
The market is already pricing in aggressive cuts and debating just how much further the dollar is expected to fall.
Brad Bechtel, global head of FX at Jefferies in New York, stated, “We’ve already weakened quite a bit in anticipation of a Fed cut cycle to come.”
The dollar’s decline received a further push after the Fed adopted an unexpectedly dovish tone and forecast 75 basis points in rate reductions for 2024 at its December policy meeting.
Markets are anticipating even more aggressive cuts, with the first reduction expected in March and 154 basis points in cuts predicted by the end of the year.
The tone of the Fed contrasted with other major central banks, including the European Central Bank (ECB) and Bank of England (BoE), which suggested that they will hold rates higher for longer.
Brad Bechtel also added, “But I do think they will capitulate. European growth is just struggling too much and inflation’s coming down relatively fast… same in the U.K. in many ways”.
Against a basket of currencies, the greenback was little changed on Friday at 101.18, rising from a five-month trough of 100.61 reached on Thursday. It is on track to lose 2.23% this year.
The euro gained 0.07% to $1.1069, hovering just below a five-month peak of $1.11395 reached on Thursday, and is heading for a 3.31% gain for the year, its first positive year since 2020.
Niels Christensen, chief analyst at Nordea, explained, “Markets are looking for a cut earlier in the U.S. and are less certain that the European Central Bank will cut as quickly, so that’s why the dollar is very soft”.
Christensen added, “We also have positive risk appetite which is another negative for the dollar. Going into 2024, the soft dollar will be a theme towards the March central bank meetings.”
Policymakers at the ECB and the BoE did not signal any imminent rate cuts at their policy meetings this month, but traders are pricing in 161 bps of cuts by the ECB next year, with the probability of two cuts by April. The BofE is also expected to cut rates by 148 bps in 2024.
