The US dollar kicked off the new year with its biggest daily jump since March as traders pared back bets on the scale of the Federal Reserve’s 2024 interest-rate reductions.
The Bloomberg Dollar Spot Index closed higher by more than 0.7% on Tuesday as Treasuries and US stocks dropped, before holding steady in Asia trading Wednesday. It was the greenback’s biggest one-day advance since the wake of regional banking turmoil more than nine months ago.
Such a euphoric start to 2024 comes after a rocky path last year, when the dollar’s performance was largely driven by speculation surrounding when — and by how much — major central banks would cut their key policy rates. The currency fell 2.7% last year, the worst annual performance since the Covid-19 pandemic shocked the world in 2020.
“The Fed expectations are still all over the map,” Brad Bechtel, global head of foreign exchange at Jefferies. “We have to see how it plays out the next few days.”
Traders are already looking ahead to Wednesday’s release of minutes from the December Fed meeting, which will offer detail on a gathering at which officials signaled an end to their aggressive campaign of interest-rate increases. An array of labor-market data due later this week is forecast to highlight a labor market that remains resilient while gradually cooling.
The dollar gained against every Asian emerging-market peer on Wednesday. The South Korean won, Malaysian ringgit and Thai baht were amongst the biggest losers against the greenback.
While most of 2023’s drop in the dollar came as Wall Street increased bets on an easing cycle, traders are now reconsidering the monetary path ahead. While central banks have indicated that they’ve likely delivered the final hikes of this cycle, they will also be reluctant to give up the fight against inflation too soon.
“Markets, with the fledgling year, haven’t entirely decided what their base case is,” Helen Given, an FX spot trader at Monex USA. “We still don’t believe the Fed will be cutting rates as soon as March, and the minutes tomorrow are likely to prove us to be more correct than not.”
