The US dollar continued its descent following the release of the Federal Reserve’s core personal consumption expenditures (PCE) price index, indicating subdued inflation and reinforcing expectations of interest-rate cuts in the coming year. The core PCE, excluding volatile food and energy components, showed a 0.1% increase in November, following a downwardly revised 0.1% gain in October, according to the Bureau of Economic Analysis.
Market Sentiment and Dollar Performance: Paresh Upadhyaya, Director of Fixed Income and Currency Strategy at Amundi Asset Management, noted that unless there’s a resurgence of inflation, the USD bear market has likely begun. The Bloomberg Dollar Spot Index fell as much as 0.3%, hitting its lowest level since July. Major peers, including the Swiss franc, euro, and Norwegian krone, strengthened against the weakening dollar.
Recent Dollar Trends: The US dollar experienced a volatile few months, initially surging in July and subsequently reversing course as economic indicators signaled easing inflation and cooling labor markets in the largest economy. December saw the dollar extend losses after the Federal Reserve communicated a clear end to its aggressive hiking campaign, projecting a series of rate cuts in 2024.
Options Market and Goldman Sachs Prediction: Demand for options favoring a stronger dollar hit its lowest level since June compared to those anticipating dollar weakness, as indicated by a one-year risk reversals index. Goldman Sachs Group Inc. predicts a potential 3% depreciation of the currency over the next 12 months.
Central Banks’ Diverging Approaches: The Federal Reserve’s dovish stance, marked by a commitment to rate cuts, contrasts with the European Central Bank’s caution against anticipating imminent reductions. The euro has appreciated about 3% against the dollar in 2023, while the dollar faces its first annual decline in three years.
Swiss Franc Performance: The Swiss franc reached its highest level against the dollar since 2015 and touched an almost nine-year high versus the euro. The franc’s outperformance is attributed to the belief that the Swiss National Bank’s preference for a stronger domestic currency will persist.
Market Expectations and Fed Officials’ Remarks: Market expectations, reflecting a belief in an imminent rate cut in March, remain unaltered despite remarks by Philadelphia Fed President Patrick Harker suggesting a gradual reduction in interest rates. Economists, however, anticipate the Fed to hold off on rate cuts until mid-2024.
Analyst Insights: Shaun Osborne, Chief Foreign-Exchange Strategist at Scotiabank, highlighted that a considerable amount of negative news is already factored into the dollar’s value, leaving room for a potential rebound in early 2024, though not immediately.
