The US dollar reached a two-week high on Wednesday, while the euro weakened across the board as markets anticipated a possible interest rate cut by the European Central Bank (ECB) in March. The euro was down 0.2% against the dollar at $1.0773, a three-week low, due to lower rate expectations and dovish commentary from central bank officials.
According to Niels Christensen, chief analyst at Nordea, the main focus in currency markets is the euro’s decline. He stated that comments from ECB policymaker Isabel Schnabel on Tuesday supported the market’s view of early rate cuts. Schnabel told Reuters that a “remarkable” fall in inflation could lead to interest rate hikes being taken off the table.
Market expectations currently place the likelihood of an ECB interest rate cut at around 85% for the March meeting, with nearly 150 basis points worth of cuts priced in by the end of next year. The ECB is expected to maintain its current record high interest rates of 4% at its meeting next Thursday. Similarly, the Federal Reserve and Bank of England are expected to keep rates steady at their respective meetings next week.
Federal Reserve officials are currently in a blackout period ahead of their meeting on December 12-13. The focus of the meeting will be the updated projections for interest rates in 2024. Traders currently predict a 60% chance of the US central bank cutting rates in March, with at least 125 basis points of cuts next year.
Aninda Mitra, head of Asia macro and investment strategy at BNY Mellon Investment Management, stated that market expectations for a very aggressive path of rate cuts next year seem excessive. Mitra believes the Fed might wait until the second quarter to cut rates, and even then, the cuts are likely to be less severe than what the market desires.
According to a Reuters poll of foreign exchange strategists, the widely expected rate cuts by the Fed will result in the dollar losing its strength against other G10 currencies next year, impacting its outlook. Currently, the dollar index, which measures the currency against six other major currencies, is up 0.1% at 104.07, reaching a two-week high of 104.10 earlier.
In Asia, the focus was on China, as market participants grappled with Moody’s cut to the country’s credit outlook. The offshore Chinese yuan rose 0.1% to $7.1694 per dollar after Moody’s announcement. Major state-owned Chinese banks increased their selling of the US dollar following the statement, which continued into Wednesday morning.
Elsewhere in Asia, the Japanese yen was down 0.1% at 147.29 per dollar. The Australian dollar rose 0.3% to $0.6574, while the New Zealand dollar rose 0.4% to $0.6154.
In the world of cryptocurrencies, bitcoin experienced a slight decline of 0.3% to $43,940, after briefly surging above $44,000 earlier in the session. Bitcoin has gained 150% this year, partially driven by optimism surrounding the potential approval of exchange-traded spot bitcoin funds (ETFs) by a US regulator.
This news article provides an analysis of the current state of the currency markets, with a focus on the US dollar and the euro. It highlights the market’s anticipation of an ECB interest rate cut in March and the potential impact of rate cuts by the Federal Reserve. The article includes quotes from various analysts and experts to provide insights into market expectations and potential future developments. Additionally, it briefly mentions the impact of Moody’s credit outlook cut on China and provides updates on other major currencies and cryptocurrencies.
More detail via Yahoo! Finance here… ( Image via Yahoo! Finance )