Dollar Tumbled Last Week Amidst Hints Of Fed's Policy Pivot

(RTTNews) - The U.S. Dollar tumbled during the week spanning December 8-15 amidst the Fed's dovish pivot that provided hints of rate cuts in 2024. The greenback weakened against major currencies while the euro and the sterling rallied as the European Central Bank and the Bank of England pushed back against rate cut expectations.

The Dollar Index, which measures the Dollar's strength against a basket of 6 currencies opened the new week on a negative note. The DXY opened on Monday at 103.98, versus 104.01 at close on December 8. Amidst anxiety that preceded the CPI data release and the FOMC decision, the index strengthened to a high of 104.26 on the same day, which eventually turned out to be the week's high.

Data released by the U.S. Bureau of Labor Statistics on Tuesday showed month-on-month headline inflation unexpectedly edging up to 0.1 percent. Markets had expected it to be steady at 0 percent. The core component edged up as expected to 0.3 percent, from 0.2 percent earlier. Annual headline inflation edged down as expected to 3.1 percent, from 3.2 percent in the previous month whereas the core component remained steady at 4 percent in line with expectations.

Data released on Wednesday showed producer prices in the U.S. steadying in November, as compared with a 0.4 percent fall in the previous period, and versus forecasts of a rise of 0.1 percent.

Though the Federal Reserve on Wednesday kept the funds rate steady at 5.25 percent-5.5 percent for a third consecutive meeting, it surprised on the forward guidance by indicating 75 bps of cuts in 2024. The greenback plunged amidst hints by the Fed on the future interest rate trajectory, dragging the index to 101.77. The index however recovered by the end of the week to close at 102.55, resulting in losses of more than 1.40 percent during the week ended December 15.

While the Fed obliged with a hints of interest rate cuts, the European Central Bank pushed back against rate cut expectations, giving strength to the euro. In its latest interest rate review communicated on Thursday, the ECB maintained interest rates at multi-year highs for the second consecutive meeting. Despite the gloomy economic condition in the bloc, policymakers also pledged to maintain rates at sufficiently restrictive levels for as long as necessary, in an effort to combat the high inflation. The EUR/USD pair which had closed at 1.0761 on December 8, rallied 1.24 percent to 1.0894 over the course of the week. The week's trading range was between the low of 1.0741 touched on Monday and the high of 1.1010 recorded on Thursday.

The British pound too gained against the U.S. Dollar over the course of the past week as the Bank of England's hawkish pause contrasted with the Fed's dovish pause. The Bank of England on Thursday upheld its benchmark interest rate at a 15-year high of 5.25 percent for the third consecutive time, and at the same time hinted at an extended period of restrictive monetary policy to curb inflation. The GBP/USD pair added 1.03 percent during the week ended December 15, rising to 1.2675, from 1.2546 a week earlier. Trading ranged between 1.2796 and 1.2499 even as data released during the week showed unemployment rate steady at 4.2 percent and GDP growth shrinking by 0.3 percent in the month of October.

The Australian Dollar gained 1.81 percent against the U.S. Dollar during the week ended December 15, rising to 0.6696, from 0.6577 a week earlier amidst renewed dollar weakness triggered by anticipation of Fed rate cuts. The week's trading range was wider, between 0.6539 and 0.6730.

The recent hints of a potentially hawkish policy pivot by the Bank of Japan and the more than expected dovishness in the Fed's recent pronouncements helped the yen surge against the U.S. Dollar during the week ended December 15. The USD/JPY pair dropped 1.92 percent over the course of the week to 142.15, from 144.93 a week earlier. The pair had traded between as high as 146.59 and as low as 140.96 over the course of the week.

The Bank of Japan's interest rate decision is due late on Monday. PCE-based inflation readings are due from the U.S. later in the week. Recent comments by Fed speakers that tried to push back on early rate cut expectations also weighed on the currency market. The Dollar Index has edged down to 102.53. The EUR/USD pair increased to 1.0915 whereas the GBP/USD pair dropped to 1.2660. The AUD/ USD pair is at 0.6727. Amidst anxiety ahead of the Bank of Japan's decision, the USD/JPY pair increased to 142.78.