The Dollar Hits Five-Month Low as US Inflation Slows
The dollar index reached a near five-month low as data revealed that annual US inflation decreased further below 3% in November, solidifying expectations for a US interest rate cut in March. Inflation, measured by the personal consumption expenditures (PCE) price index, stood at 2.6% in the 12 months leading up to November, down from 2.9% in October.
The core PCE price index, which excludes food and energy components, rose by 3.2% year-on-year in November, the smallest increase since April 2021. The Federal Reserve uses the PCE price measures to track its 2% inflation target. According to Stuart Cole, chief macro economist at Equiti Capital, the data will reinforce the Fed’s inclination towards looser monetary policies.
Dollar Weakens Due to Anticipated Rate Cuts
Following last week’s Federal Reserve meeting, where traders anticipated several rate cuts in 2024 starting from March, the dollar has faced selling pressure. However, US Federal Reserve officials have since pushed back on the idea of swift rate cuts next year. The dollar is set to finish the year down approximately 2%. Despite this decline, the strength of the US economy may limit further depreciation of the greenback.
European Central Bank Policy Outlook
The euro saw a slight increase of 0.02%. ECB policymaker Bostjan Vasle stated that it would take until spring for the European Central Bank to reassess its policy outlook. Market expectations for an interest rate cut in March or April are considered premature according to Vasle. Meanwhile, sterling gained 0.09% against the dollar following positive retail sales data but a downward revision of third-quarter GDP.
Japan’s Core Inflation Slows, BOJ Maintains Loose Policy
The dollar rose against the yen by 0.25% as Japan’s core inflation significantly slowed in November, giving the central bank more time before phasing out its monetary stimulus. The Bank of Japan (BOJ) recently maintained its ultra-loose policy settings and provided no hints about moving away from negative interest rates.
Australian and New Zealand Dollars Rise, Cryptocurrencies Slip
The Australian and New Zealand dollars, which are sensitive to risk sentiment, traded higher. The Aussie reached its highest level since July at $0.6825, while the kiwi also climbed to a five-month high at $0.62985.
Bitcoin slipped by 0.34% to $43,726, just below its eight-month high of $44,729 earlier this month. The crypto market has experienced a revival this year due to filings for spot bitcoin and ether ETFs, including those from traditional finance giants.
Hot Take: US Inflation Continues to Impact Dollar Performance
The US dollar continues to face challenges as annual inflation slows below 3% in November. This data supports expectations for an interest rate cut next March and highlights the Federal Reserve’s move towards looser monetary policies. As the dollar weakens, other major currencies like the euro and pound gain ground against it. However, the strength of the US economy may provide some resistance to further depreciation of the greenback. Additionally, cryptocurrencies experience mixed performance as bitcoin slips while filings for crypto ETFs contribute to a market revival.
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