On Monday, the dollar index experienced a significant decline, reaching its lowest point in over two months. This downward trend has persisted from the previous week, with investors widely speculating that the U.S. Federal Reserve has concluded its cycle of raising interest rates. Consequently, market participants are now shifting their focus towards anticipating when the central bank might initiate a rate reduction.
The dollar index reached a new low of 103.37, its lowest point since September 1st. Last week’s decline of almost 2% was the largest weekly percentage decrease since mid-July.
The Fed Has No Plans to Raise Rates
The pricing of markets indicates that there is no anticipation for further rate hikes by the Federal Reserve. This is due to recent data revealing a deceleration in economic growth and decreased inflationary pressures. However, these developments have not reached a level that would cause significant concerns about an imminent and severe recession.
The Conference Board reported on Monday that the leading economic indicator experienced a decrease of 0.8% in October. This figure was slightly lower than the anticipated 0.7% decline and marked the 19th consecutive monthly decrease.
The economic calendar appears relatively light this week. The United States observes the Thanksgiving Day holiday on Thursday, resulting in a shortened work week.
The current focus of markets is to ascertain the Federal Reserve’s potential interest rate reduction timing. As per CME’s FedWatch Tool, there is a probability of over 50% that a rate cut of at least 25 basis points will occur by May.
The consensus among market participants, including those involved in credit, equities, and currencies, is that the Federal Reserve has concluded its rate hikes. However, the Federal Reserve has not explicitly expressed its stance. According to Joseph Trevisani, a senior analyst at FXStreet.com, it is a widely recognized fact that we are familiar with this situation and the information associated with it.
There is a noticeable trend of the dollar experiencing a gradual decline, primarily due to the Federal Reserve’s efforts to maintain interest rates rather than specifically focusing on strengthening the dollar.
Recent statements made by certain Federal Reserve officials have left open the possibility that additional increases in interest rates may be necessary in the event of a shift in economic indicators.
Inflation Will Remain at a Fairly High Level
In a recent statement, Thomas Barkin, the president of the Richmond Federal Reserve, expressed his belief that inflation will persist and pose a challenge for the central bank. He suggested that this may result in the need for the bank to maintain higher interest rates for a longer duration than what investors presently expect.
Furthermore, the minutes from the most recent meeting of the Federal Reserve are set to be disclosed on Tuesday, and market participants will carefully analyze the remarks in search of any indications regarding the future direction of the central bank’s policies.
In opposition to the weaker U.S. dollar, the euro peaked on August 15th at $1.0952, while the yen strengthened to its highest level in 6 and a half weeks at 148.09 per dollar. The dollar’s latest trading against the yen stood at 148.36 yen, reflecting a decrease of 0.84%.
The euro’s value has increased significantly due to the anticipation that the European Central Bank (ECB) is slightly behind the Federal Reserve (Fed) regarding monetary policies. The ECB is expected to continue with its plan to raise interest rates even after the Fed has completed its cycle of rate hikes.
The Sovereign Rating of Italy and Portugal Was Changed
Furthermore, Moody’s (NYSE:MCO) surprisingly revised the forecast for Italy’s ‘Baa3’ sovereign rating, changing it from negative to stable. Additionally, Portugal’s rating received a two-notch upgrade to ‘A3’.
The exchange rate of the British pound, also known as sterling, was recorded at $1.251, showing a 0.36% increase for the day. This rise came after it reached its highest point in two months, reaching $1.2518.