Dollar Remains Weak Amid Expectations of U.S. Rates Peaking

The dollar continued to weaken against major currencies, reaching multi-month lows on the euro and other currencies as investors anticipate declining U.S. interest rates in the coming year.

In early Asian trading, the dollar index slipped below its 200-day moving average, extending its recent weakness. The index, which measures the dollar against six major currencies, fell by 1.9% over the previous week, alongside a significant rally in U.S. Treasuries. It further lost 0.5% overnight, reaching 103.44.

The euro touched a three-month high of $1.0952 on Monday, partly influenced by European Central Bank governing member Pierre Wunsch’s comments pushing back against expectations of rate cuts in April.

The yuan also reached a three-month high against the dollar as China’s central bank guided it higher, with the Australian and New Zealand dollars following suit.

Analysts noted that the dollar is struggling as markets believe the Federal Reserve is nearing the end of its rate hikes. The overvaluation of the dollar index suggests that a correction to fair value is likely as markets take a more relaxed view of Fed policy.

One U.S. recession indicator, the Conference Board’s October leading economic indicator, declined by 0.8%, marking its 19th consecutive monthly fall. The focus now turns to the Federal Reserve meeting minutes scheduled for later on Tuesday.

Market expectations have largely ruled out further rate hikes in December or next year, with a 1-in-4 chance of easing starting in March implied by futures. Futures also suggest approximately 90 basis points of cuts for 2024, up from 77 basis points before a benign October U.S. inflation report shook markets.

In offshore trade, the yuan held its gains at 7.1640 per dollar, while the Australian dollar remained firm at $0.6561, just below its recent three-month high. The New Zealand dollar held steady at $0.6040.

Even the yen rallied to a seven-week high of 148.1 per dollar before steadying at 148.3 on Tuesday. The yen had been under pressure this year, falling 11.6% against the dollar as U.S. interest rates rose while Japan maintained an ultra-easy monetary policy.

The calendar for the week is relatively light, with the U.S. Thanksgiving holiday approaching. Besides the Fed minutes, U.S. housing and Canadian inflation data are due later on Tuesday, along with a speech from ECB President Christine Lagarde.