The U.S. Dollar Index Set for First Weekly Fall in 2024 as Fed Rate Cut Expectations Shift
The U.S. dollar index is on track for its first weekly decline in 2024 as investors take a break from buying the currency. This pause comes after an almost two-month rally that was driven by expectations of the Federal Reserve cutting rates later than previously anticipated.
Investors have adjusted their expectations for the first rate cut by the Fed from May to June. Additionally, they have significantly reduced their projections for how much the central bank will lower its benchmark rate. While Fed officials have projected three 25 basis point cuts this year, markets had priced in as many as seven.
This year’s rally of the dollar has been based on the belief that the markets will align with the Fed’s stance. However, some traders are now starting to factor in the possibility of weaker economic data and a slowdown in economic indicators.
Market Analyst Predicts Weakening Dollar in Second Quarter
Market analysts anticipate a weakening dollar in the second quarter of this year. They believe that if the Fed cuts rates in June and continues to do so once every quarter, it will contribute to the dollar’s decline.
Athanasios Vamvakidis, global head of G10 forex strategy at BofA Global Research, suggests that if the U.S. economy remains strong and the Fed is unable to cut rates in June or even this year, their view may need to be revised.
Improved risk appetite in stock markets around the world has also diminished demand for the U.S. dollar, which is typically considered a safe-haven currency.
Yen Performs Poorly Against Greenback
The Japanese yen is currently the worst-performing G10 currency this year, with the dollar gaining 6.6% against it. Investors are seeking better yields elsewhere and betting that Japan’s rates will remain near zero for an extended period.
Carry trades, where investors sell or borrow yen and invest in higher yielding currencies, are becoming more popular as the Fed is expected to maintain higher rates for a longer period.
Bitcoin, a popular cryptocurrency, fell 1.14% to $51,050.
Hot Take: Dollar Takes a Breather as Fed Rate Cut Expectations Shift
The U.S. dollar’s rally has paused as investors reassess their expectations of the Federal Reserve’s rate cuts. This shift in sentiment has resulted in the dollar index experiencing its first weekly decline in 2024. While some traders anticipate weaker economic data and a slowdown in indicators, market analysts predict a weakening dollar in the second quarter if the Fed cuts rates as projected. The Japanese yen is currently underperforming against the greenback due to investors seeking higher yields elsewhere. Overall, these developments highlight the influence of monetary policy on currency performance and investor sentiment in the global market.
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