Dollar feels the heat as Fed’s dovish pivot weighs; euro, pound firm

Singapore, Dec. 15 (BNA): The dollar was set for its steepest weekly drop against major currencies since July, weighed by growing prospects of U.S. rate cuts next year, while the euro and pound found support on Friday as central banks in Europe stuck to their hawkish paths.

The spotlight will now switch to Bank of Japan’s meeting next week with the central bank likely to end the year as one of the world’s most dovish as expectations of the BOJ to exit its ultra loose monetary policy fade.

In an action-packed week for central banks, traders found more clarity on when interest rate cuts were likely after Federal Reserve Chair Jerome Powell said at Wednesday’s meeting that the tightening of monetary policy is likely over, with a discussion of cuts coming “into view”.

That has resulted in the greenback sliding against rivals, with the dollar index at 102.01, 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.

Chris Weston, head of research at Pepperstone, said the aftermath of the central bank fest is that the market has brought forward the timing of cuts expected in 2024, with many participants now expecting them to start around March.

Markets are now pricing in a 75% chance of a rate cut in March by the Fed, according to CME FedWatch tool.

They are also pricing in 150 basis points in rate reductions by December 2024, double the Fed’s projections that implied 75 basis points of cuts next year.

Such market pricing reflects an overly optimistic view of U.S. core inflation being able to return to 2% without requiring substantial economic pain, said Hamish Pepper, fixed income and currency strategist at Harbour Asset Management.

“The risk for markets is that policy rates may need to stay at more elevated levels for longer than anticipated.”

The shift in Fed’s tone has led Treasury yields lower, with U.S. benchmark 10-year yields sinking to their lowest since July on Thursday at 3.885%. They were last at 3.947% in Asian hours.

M.I.