Dollar’s Dismal Dive: Worst Year Since COVID Outbreak as Pessimism Peaks

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U.S. dollar wraps worst-performing year since ‘pandemic’ began

The Federal Reserve’s recent indications of a cut in interest rates have spurred increased negative perceptions of the dollar, largely driven by expectations of the Fed’s response to the US economic slowdown.

The dollar wrapped up its worst-performing year since the pandemic began, with growing Wall Street sentiments pointing towards a likely interest rate decrease by the Federal Reserve in 2024.

Initial forecasts suggested the Fed would ease its rate hikes. However, according to Bloomberg’s assessment, the currency faced a 2.7 percent decline in 2023, marking its sharpest drop in three years. This decline was especially pronounced in the final quarter of the year.

The primary driver was the heightened anticipation of policy shifts by the Federal Reserve in response to the deceleration of the US economy. Such developments undermine the dollar’s standing, particularly in comparison to central banks that might uphold more favorable rates.

Swaps traders now project a substantial interest rate cut by the Federal Reserve, potentially reaching 1.5 percent. This change is more aggressive than earlier predictions, which had estimated a cut of less than one percent.

This revised expectation surpasses recent assessments by Federal Reserve officials. Since the Federal Reserve’s December meeting, a growing number of traders have expressed pessimism about the US dollar’s ability to hold its value.

Recent signals from the Federal Reserve suggesting a pause in its tightening strategies have reinforced the tendency to bet against the dollar. Current data from the Commodity Futures Trading Commission reveals a rise in bearish sentiment towards the greenback among non-commercial traders, including hedge funds and asset managers. Specifically, there has been an increase of over 10,000 contracts, totaling more than 39,000, linked to projections of the US dollar’s decline, especially following the Federal Reserve’s meeting.

While the Federal Reserve exercises caution, decision-makers at the European Central Bank have refrained from predicting immediate rate cuts. Consequently, the euro has strengthened by approximately three percent against the dollar this year, showing the potential for the dollar’s first annual decline in three years.

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