© Reuters. Banknotes of Japanese yen are seen in this illustration picture taken June 15, 2022. REUTERS/Florence Lo/Illustration/file photo
By Brigid Riley
The U.S. dollar took a dip against most major currencies on Wednesday, reflecting traders’ anticipation of interest rate cuts by the U.S. Federal Reserve. This dip occurred ahead of upcoming inflation data, contributing to the build-up of selling pressure on the dollar.
The only exception was the yen, which the dollar managed to hold firm against, following the Bank of Japan’s decision to remain quiet about its ultra-loose monetary policy the day before.
There has been a reaction from Fed officials since last week’s Federal Open Market Committee meeting, after three rate cuts were envisioned for 2024, which ignited a financial market rally.
Market participants are presently estimating a 67.5% chance of the first rate cut occurring at the Fed’s March meeting, as per the CME FedWatch tool.
“The proverbial genie is out of the bottle now, and the Fed either has to accept that and risk easing policy prematurely or push back very hard and cause a bit of volatility in the markets,” said Kyle Rodda, senior financial market analyst at Capital.com.
While Atlanta Federal Reserve President Raphael Bostic expects two rate cuts to happen in the second half of the year, he noted that there is no “urgency” at present.
On the same day, Richmond Fed President Thomas Barkin stated that the central bank’s ability to deliver on forecasts of rate cuts depends on economic performance.
The dollar was last mostly flat at 102.20 after sliding over 0.3% on Tuesday and reaching a four-month low of 101.76 last week.
Ultimately, the dollar’s movement will depend on economic data supporting the rate cuts that have been priced in, said Rodda.
“The U.S. dollar is the inverse of the so-called ‘everything rally,’ which will beat on if the data confirms the need for cuts next year,” he said.
The Fed’s preferred measure of underlying inflation, the core Personal Consumption Expenditures (PCE) price index, is due this week, and may provide clarity on whether inflation has slowed enough for the Fed to begin easing policy next year.
Meanwhile, the dollar had the yen pinned lower at 143.78 yen, after the Japanese currency fell to as low as 144.95 the previous day.
The yen had been trading around the low 142 range on Tuesday before the Bank of Japan announced its monetary policy decision, and weakened further after the Japanese central bank’s chief Kazuo Ueda gave no hints on an imminent end to negative interest rates.
Ueda’s “lack of ‘hawkishness’ should reinforce the perceptions next April is the earliest likeliest date for a policy shift,” National Bank of Australia’s Senior FX Strategist Rodrigo Catril said in a note.
Elsewhere, the euro held firm at $1.0973,