The US dollar experienced a slight decline on Friday, December 5, as global currency traders positioned themselves for an almost certain interest rate reduction by the Federal Reserve scheduled for the following week. The dollar's movement remained within a narrow band against other major currencies, reflecting a market in wait-and-see mode ahead of the pivotal central bank meeting.
Markets Bet Heavily on Dovish Fed Pivot
Financial markets have overwhelmingly priced in a shift in US monetary policy. Data from LSEG indicates traders are assigning a nearly 90% probability to a Federal Reserve rate cut at its December meeting. Expectations are also building for potentially two additional reductions in the coming year. This consensus solidified following recent soft labour market data, according to analysts.
Major financial institutions have aligned their forecasts with this market sentiment. Morgan Stanley revised its outlook on Friday, now predicting a quarter-percentage point cut in December. This move brings it in line with peers JPMorgan and BofA Global Research, all of whom were influenced by recent dovish commentary from Fed officials. All three brokerages had previously anticipated the Fed would hold rates steady this month.
Antonio Ruggiero, FX & macro strategist at Convera, noted, "The dollar also continues to look overvalued relative to major peers, with the softer tone therefore fully justified." The currency's weakness persisted despite a report showing an improvement in US consumer sentiment in early December, underscoring the dominant influence of rate cut expectations.
Yen Gains Ground on BOJ Policy Speculation
In Asian trading, the Japanese yen edged higher, supported by growing speculation that the Bank of Japan (BOJ) might end its long-held negative interest rate policy. The yen rose 0.1% to 155.295 against the dollar. This follows reports from Bloomberg and Reuters suggesting BOJ officials are prepared to raise rates at their December 19 meeting, barring any major economic shocks.
"As the funding currency of choice in the carry trade, some unwinding in light of higher JPY rates is poised to boost the yen," explained Convera's Ruggiero. This potential policy shift marks a significant moment for global finance, as the BOJ has been a holdout in the global tightening cycle.
Central Bank Bonanza and Crypto Slide
The coming weeks will be critical for global markets, with a parade of central bank decisions on the calendar. After the Fed's announcement on Wednesday, December 10, attention will turn to the Reserve Bank of Australia, Bank of Canada, and Swiss National Bank. The following week will feature decisions from the BOJ, European Central Bank, Bank of England, and Sweden's Riksbank.
In the cryptocurrency space, leading digital asset Bitcoin fell for a second consecutive session, slipping 3% to $89,701. This decline highlights the ongoing volatility in the crypto market amid shifting traditional finance dynamics.
Adding another layer to the US monetary policy narrative, investors are weighing the prospect of White House economic adviser Kevin Hassett potentially succeeding Jerome Powell as Fed Chair when Powell's term ends in May. Market analysts, like ING's Chris Turner, believe this has added to the dollar's softness, on the view that Hassett would advocate for a more dovish stance.
