Dec 20, 2023

The Federal Reserve’s pivot to rate cuts has hurt the greenback over the last week. 


Dollar Index – Daily Chart

The dollar index trades at 102.55 after another drop through the 103 support. The price found buyers at 101.77 but would need to return above 103 or risk further losses. 

The US dollar index measures the currency against other major global currencies, and weakness would drive gains in those overseas currencies. 

After strengthening the Fed’s aggressive rate hikes, the bank pivoted last week from a pause to talk of cuts. Officials are now trying to scale back those predictions. The Chicago Fed’s Austin Goolsbee said:  

“It’s not what you say or what the Fed Chair says; it’s what they hear and what do they want to hear?” Goolsbee said in an interview with CNBC. 

“I was confused by what the market was imputing. I was surprised that the market reacted that way… the markets are a little bit ahead… they jumped to the end part, which is ‘We’re going to normalise quickly’, and I don’t see that.” 

He also confirmed what another Fed official said about not discussing future rate cuts at the meeting. 

“We don’t debate specific policies speculatively about the future,” Goolsbee said. 

The stock and currency markets may have exaggerated the potential for rate cuts in 2024, which will be the theme for the year ahead. 

This week has many economic data sets that will give strength to or further weakness in the US dollar. 

Wednesday has consumer confidence figures for the economy, followed by a final confirmation of GDP on Thursday. Friday will have further consumer sentiment and inflationary data with the core PCE and a durable goods number: businesses’ investment in plant and machinery. 

The strength of the US economy is also likely to keep interest rates at a reasonably high level. Gross domestic product in the United States grew at a sharp 5.2% in the third quarter, ahead of China, which was previously the world’s growth engine. 

“The US has outperformed relative to other countries for the past year,” said Innes McFee, chief economist for Oxford Economics. The European Union and the UK are stuttering near recession, while Japan and Canada are subdued. 

Suppose investors see continued strength in the US economy. In that case, they may scale back their rate cut expectations for 2024 and boost the dollar.

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