The US dollar remained under pressure on Wednesday, poised to record its most significant annual decline since 2017. This persistent weakness comes despite a recent batch of robust economic data, as currency traders globally continue to bet on the Federal Reserve implementing further interest rate cuts next year.
Fed's Dovish Path Outweighs Strong US Economic Data
Investor sentiment appears firmly fixed on a future of monetary easing from the American central bank. Notably, Tuesday's solid Gross Domestic Product (GDP) figures failed to alter market expectations. Traders are currently pricing in approximately two additional 25-basis-point cuts from the Fed in 2026.
Goldman Sachs Chief US Economist David Mericle reinforced this outlook, stating, "We expect the FOMC to compromise on two more 25 bp cuts to 3-3.25% but see the risks as tilted lower." He pointed to a consistent slowing of inflation as the primary rationale behind this forecast.
Consequently, the dollar index, which measures the greenback against a basket of major currencies, fell to a two-and-a-half-month low of 97.767. It is on track to lose 9.8% for the year. Any further depreciation in the final week of 2024 would mark its most substantial annual fall since 2003.
Global Central Banks Diverge, Boosting Euro and Pound
While the Fed's path is seen as downward, the monetary policy trajectory for other major central banks appears to have shifted. The European Central Bank (ECB), after holding rates steady last week and revising its growth projections upward, is now seen as having closed the door on near-term easing.
This divergence has propelled the euro and the British pound to fresh three-month highs. The euro was last broadly steady at $1.180, putting it on track for a 14% annual gain—its best performance since 2003. Sterling traded around $1.3522, having gained over 8% this year.
The Reserve Bank of Australia (RBA) and the Reserve Bank of New Zealand (RBNZ) are also part of this trend, with markets now anticipating their next policy moves to be rate hikes, not cuts. This expectation lifted the Australian dollar to a three-month peak of $0.6710 and the New Zealand dollar to a two-and-a-half-month high of $0.58475.
Yen in Focus as Tokyo Issues Intervention Warning
The spotlight in the foreign exchange market, however, remains firmly on the Japanese yen. Traders are on high alert for potential intervention by Japanese authorities to stem the currency's prolonged weakness.
Finance Minister Satsuki Katayama issued a stern warning on Tuesday, stating Japan has a "free hand" in responding to excessive yen moves. This verbal intervention successfully arrested the yen's slide, with the dollar falling 0.3% to 155.83 yen on Wednesday.
Analysts note that despite the Bank of Japan's long-awaited rate hike last Friday, Governor Kazuo Ueda's subsequent comments lacked the hawkish tone some expected, leaving the yen vulnerable. With trading volumes thinning towards the year-end, market participants believe conditions are ripe for Tokyo to step into the market if the yen's decline accelerates again.
In a broader trend, most major currencies have lost significant ground against precious metals like gold, which hit a fresh record high. Meanwhile, currencies of smaller European nations with strong fiscal positions, such as the Norwegian crown, Swiss franc, and Swedish crown, have been among the year's top performers against the beleaguered dollar.
