Dollar takes a dive after Fed signals rate cuts next year

U.S. Dollar banknote is seen in this illustration taken July 17, 2022. REUTERS/Dado Ruvic/Illustration/File hpoto

TOKYO  – The dollar was under pressure on Thursday after the Federal Reserve‘s latest economic projections indicated that the interest–rate hike cycle has come to an end and lower borrowing costs are coming in 2024.

Both the euro and Japanese yen jumped in response, with the European Central Bank (ECB) preparing to announce its policy decision later on Thursday and the Bank of Japan coming up next week.

Fed Chair Jerome Powell said at Wednesday’s Federal Open Market Committee (FOMC) meeting that the historic tightening of monetary policy is likely over, with a discussion of cuts in borrowing costs coming “into view.” Policymakers were nearly unanimous in their projections that borrowing costs would fall in 2024.

READ: With rate hikes likely done, Fed turns to timing of cuts

“This is a huge development for markets as we head into the new year and provides much-needed clarity. And clarity in this instance meant risk-on,” said Matt Simpson, senior market analyst at City Index.

The news from the FOMC meeting will likely overshadow upcoming economic data before personal consumer expenditures data is published next week, leaving room for “further downside potential for the US dollar,” he added.

The U.S. dollar index, which measures the greenback against a basket of currencies, was last 102.87 after dipping as low as 102.77 overnight.

Markets are now pricing in around a 75-percent chance of a rate cut in March, according to CME FedWatch tool, compared with 54 percent a week earlier.

While recent economic releases have strengthened expectations that the Fed can achieve a soft landing for the U.S. economy, Powell kept open the option to act again if needed, noting that “the economy has surprised forecasters.”

Focus now on ECB, BOE

Market focus now shifts to a parade of central bank decisions, including the ECB and the Bank of England (BoE), Norges Bank and Swiss National Bank.

READ: Bank of England keep rates at 15-year high, rules out quick cuts

With the ECB expected to hold rates steady, there will be more focus on forecasts for GDP and inflation, “and whether and how convincingly (ECB President Christine) Lagarde pushes back on pricing for cuts, with 100 (basis points) priced by September,” National Australia Bank Senior Economist Taylor Nugent wrote in a note.

The euro was mostly flat at $1.0882 after surging on Wednesday. Sterling was last trading at $1.2623.

The Norwegian central bank is considered to be the only bank that could potentially raise rates. There is also a risk the SNB could dial back its support for the Swiss franc in currency markets.

Elsewhere, the yen sat significantly higher around 142.80 yen per dollar following the greenback’s overnight tumble.

Expectations that the Bank of Japan (BOJ) could end negative interest rates at its monetary policy meeting on Dec. 18-19 caused the Japanese currency to jump last week, but those hopes have largely died down after Bloomberg reported on Monday that BOJ officials see little need to rush.

READ: Yen rallies on hints of BOJ policy shift

Pressure will be on BOJ Governor Kazuo Ueda next week when he’s expected to keep alive prospects of an exit while dampening anticipation of an imminent move.

In cryptocurrencies, bitcoin was up at $42,904.