The dollar was set for a steep weekly fall on Friday, as traders bet on a slowdown in the pace of interest rate hikes by the US Federal Reserve. The dollar index, which tracks the greenback against a basket of major currencies, was down by 1.6% on the week, its biggest drop since mid-July.
The move in the dollar came after data released on Tuesday showed that US consumer price inflation eased in October, giving the Fed more leeway to slow down the pace of its monetary tightening. Traders are now pricing in a 75% chance of a 50 basis point rate hike at the Fed’s next meeting in December, down from 80% earlier in the week.
The dollar’s weakness was positive for other currencies, with the euro and the pound both gaining ground. Weaker-than-expected retail sales figures in Britain added to a slew of negative readings this week, but sterling trickled up higher to $1.2418, up 0.10% on the day. Sluggish data globally has raised concerns about economic prospects, but also suggests central banks may be winning in their fight against soaring prices. The dollar index was down 0.3% on the day at 104.1, while the euro edged up 0.1% to $1.08665 after data confirmed year-on-year inflation in the euro zone slowed sharply in October. The yen which has been punished broadly by dollar strength – broke the 150 mark versus the dollar for the first time in nearly two weeks. The dollar lost as much as 1% versus the Japanese currency and was last down 0.9% at 149.320 yen.
According to analysts, the current decline in the dollar is likely to be temporary. The market still anticipates a total of 100 basis points in interest rate hikes by the end of the year. However, the recent data hints that the Fed may be nearing the end of its aggressive tightening cycle, which could potentially support the dollar over the longer term.
The dollar’s fall is likely to have a ripple effect across financial markets. The decline in the greenback could help to ease inflationary pressures in other countries, which could lead to a moderation in rate hikes by central banks around the world. This could be positive for risk assets, such as stocks and bonds. The dollar’s weakness could also boost exports from the United States, making American goods more competitive in global markets. This could be a positive development for the US economy.
Overall, the dollar’s decline is a complex issue with far-reaching implications. While the move is likely to be temporary, it could have a significant impact on financial markets and the global economy.