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March 4, 2024

Dollar Plunges to Multi-Year Lows on Fed Rate Cut Bets

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Dec 29, 2023

The US dollar index has plunged to its lowest level since August 2022, heading for its worst year since 2020, as traders bet aggressively on Federal Reserve interest rate cuts in 2023.

Dollar Suffers Steepest Drop Since 2020

The dollar dropped over 7% in 2022, marking its steepest annual decline since 2015. The selling pressure accelerated dramatically in December, with the dollar index sinking nearly 5% this month alone as expectations for a Fed pivot solidified.

Several key factors drove the sharp dollar reversal:

  • Cooling Inflation – US inflation slowed more than expected to 6.5% in November from a peak of 9.1% in June. This raised confidence that the Fed can stop hiking rates soon and perhaps start cutting by mid-2023.
  • Lower Terminal Rate – Futures markets now price the terminal Fed funds rate peaking below 5% in May/June 2023, down from over 5.25% previously.
  • Increasing Recession Risk – Leading indicators like manufacturing PMIs signal the US economy may tip into recession in 2023. This raised bets for Fed rate cuts to counteract the downturn.
US Dollar Performance in 2022

| Currency | Year-to-Date Performance | 
| ----------- | ----------- |
| Euro | +8.7% |
| Japanese Yen | +13.8% |
| Canadian Dollar | +8.4% |

As shown in the table above, the greenback suffered heavy double-digit losses versus the euro, yen and loonie this year on easing Fed policy expectations.

88% Chance of March Rate Cut

Markets now see an 88% probability that the Fed will cut rates by 25 basis points at their March 2023 meeting. This would be a remarkably swift dovish pivot after a year of supersized rate hikes.

Additional cuts are also priced later in 2023, with markets anticipating the fed funds rate falling back near 3.75% by year-end. This is fueling an increasingly bearish dollar outlook.

Fed Funds Futures Implied Rate Levels

| Month | Implied Fed Funds Rate | Chance of 25 bp Cut |  
| ----------- | ----------- | ----------- |
| March 2023 | 4.50-4.75% | 88% |
| June 2023 | 4.25-4.50% | 63% |  
| December 2023 | 3.75-4.00% | 51% |

As seen above, the odds of at least 75 basis points of Fed cuts by the end of 2023 are quite high based on futures pricing. This is undercutting the dollar by eroding monetary policy support.

Technical Breakdown Accelerates

On the technical front, dollar bears cleared several key support levels which exposed the greenback to further steep losses:

  • Trendline Break – The dollar index decisively broke below its bullish 2022 ascending trendline near 104. This was a big technical crack that unleashed heavy stop-loss selling.
  • 50-Week MA – Prices sank under the closely watched 50-week moving average currently around 102. This is often viewed as a make-or-break level for long-term trends.
  • Psychological Support – The US dollar index recently cratered below the 100 level for the first time since August. This intensifies negative sentiment and downward momentum.

Bullish Dollar Reversal in 2024 Unlikely

While an aggressive Fed pivot toward rate cuts suggests dollar weakness persists into 2023, several analysts argue a bullish dollar recovery late next year is unlikely.

That’s because even after expected rate cuts, Fed policy would still sit well above other major central banks. For example:

  • The ECB just raised rates to a peak of 2.5% and may struggle hiking much further amid a looming Eurozone recession.
  • The BOE seems close to ending its rate hike cycle around 4% due to collapsing growth and surging inflation.
  • The BOJ remains firmly dovish and may further ease policy if the weak yen sparks high imported inflation.

With the Fed still the global tightening leader despite cuts, dollar bears look poised to maintain control through end-2024.

What’s Next for USD: Critical Levels to Watch

In the near-term, traders will watch critical dollar index support levels near 98.50 and the 2022 low of 98.00. A daily close below 98.00 would confirm a major long-term trend change and likely accelerate losses.

On the topside, initial resistance comes in around 101.50 and 102. Regaining these levels seems unlikely given overwhelming Fed cut bets and negative technical momentum.

As we move through 2023, key support to monitor comes in around 95.00 – 96.00 based on the pre-pandemic dollar range. That area marks the ultimate downside target for dollar bears by end-2023 in an aggressive Fed easing scenario.

In summary, the plunging US dollar’s steep losses look set to continue based on a decidedly dovish Fed policy outlook. While the pace of declines may moderate, years of dollar strength finally appear to be reversing course on cooling inflation and recession risks. Dollar bears now have their sights set on regaining multi-year lows last seen before the pandemic currency turmoil.

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AiBot scans breaking news and distills multiple news articles into a concise, easy-to-understand summary which reads just like a news story, saving users time while keeping them well-informed.

To err is human, but AI does it too. Whilst factual data is used in the production of these articles, the content is written entirely by AI. Double check any facts you intend to rely on with another source.

By AiBot

AiBot scans breaking news and distills multiple news articles into a concise, easy-to-understand summary which reads just like a news story, saving users time while keeping them well-informed.

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