The U.S. dollar remained stable on Monday, following inflation data that indicated only a modest rise in November, easing fears about the Federal Reserve accelerating rate cuts in 2024. Meanwhile, the Japanese yen hovered near 156 per dollar, raising the likelihood of intervention by Japanese authorities.
Investor confidence received a boost over the weekend as the U.S. Congress passed a spending bill, averting a potential government shutdown. With year-end holidays approaching, trading volumes are expected to thin during this shortened week.
Fed’s Stance Shocks Markets
Last week, the Federal Reserve surprised markets by signaling a slower pace of rate cuts ahead, driving up Treasury yields and strengthening the dollar. This announcement cast a shadow over emerging economies, which are particularly sensitive to U.S. monetary policy shifts.
Friday’s release of the Fed’s preferred inflation gauge revealed moderate monthly price increases, with core inflation—excluding volatile food and energy prices—recording its smallest monthly rise in six months. However, annual core inflation remains significantly above the Fed’s 2% target.
Traders are now pricing in 44 basis points of rate cuts for 2024, a slight reduction from the two 25-basis-point cuts projected by the Fed. This is a notable shift from September when four cuts were anticipated. Market pricing also suggests the first easing of 2025 will now likely occur in June, rather than earlier in the year.
The dollar index, which measures the U.S. currency against six major peers, held steady at 107.78, close to its two-year peak of 108.54 reached last Friday.
Euro and Yen Under Pressure
The euro remained weak at $1.0434, near its two-year low from November, and has declined by 5.5% in 2023. Meanwhile, the yen traded at 156.65 per dollar, near a five-month low reached last week.
“The Fed’s shift in rate cut projections may feel like a crisis now, but it could just be another bump in the road,” said Brian Jacobsen, chief economist at Annex Wealth Management. “This year has been full of events that seemed like existential crises at the time but turned out to be temporary hurdles.”
The yen’s prolonged weakness stems from the Bank of Japan’s decision to maintain its accommodative monetary policy. Governor Kazuo Ueda recently signaled a low likelihood of a rate hike next month, further widening the interest rate gap with the U.S.
This persistent pressure has fueled speculation about potential intervention by Japanese authorities. Verbal warnings from Tokyo have intensified, with analysts predicting continued rhetoric to stabilize the currency through the year’s end.
A Year of Turbulence for the Yen
The yen’s performance in 2023 has been marked by volatility. It reached multi-decade lows in April and July, plunging to 161.96 per dollar and prompting intervention from Tokyo. It then rebounded to a 14-month high of 139.58 in September before weakening again to its current level near 156.
The yen has depreciated more than 10% against the dollar this year, making 2023 its fourth consecutive year of declines.
“The thinning liquidity during the holiday season amplifies the risk of rapid currency moves, which could push the yen to levels that historically triggered intervention,” said Kyle Rodda, senior financial analyst at Capital.com. “Friday’s U.S. inflation data provides some relief, as it underscores the fundamental drivers of yen depreciation—higher inflation and interest rate expectations in the U.S.”
Sterling and Commodity Currencies Hold Ground
In other currency markets, the British pound traded flat at $1.2571. Meanwhile, the Australian and New Zealand dollars stabilized after hitting two-year lows last week, reflecting steadier global sentiment.
As markets adjust to evolving monetary policies, investors remain watchful for further developments that could shape currency trends heading into the new year.
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Fed’s Anticipated Rate Cut and the Impact on the Dollar as Markets Eye the Dot Plot
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