Dollar Strengthens Amidst Global Interest Rate Adjustments and Hotter-Than-Expected US Inflation
The US dollar surged on Thursday, buoyed by stronger-than-anticipated inflation data and a series of interest rate cuts by central banks around the globe. The Labor Department’s report revealed a 0.4% month-on-month increase in producer prices for November, surpassing the 0.2% rise predicted by economists. This fuelled the dollar’s ascent, pushing the DXY index, a measure of the dollar against a basket of six major currencies, up by 0.375% to 106.95. This upward momentum follows a separate US inflation report on Wednesday that solidified market expectations for a Federal Reserve interest rate cut next week.
Market sentiment now overwhelmingly favors a 25 basis point reduction at the Fed’s December 17-18 meeting, with the CME FedWatch tool indicating a near-certainty of this outcome, compared to a 78% probability just a week ago. Analysts attribute the dollar’s resilience to the divergence in monetary policy between the US and other major economies. Even with an anticipated rate cut, the US maintains comparatively higher interest rates, attracting investors and bolstering the dollar’s relative strength. This differential is expected to persist despite recent rate cuts by the Bank of Canada, Swiss National Bank, and European Central Bank.
The European Central Bank cut its key interest rates by 25 basis points on Thursday, maintaining a dovish stance amid subdued inflation and persistent economic weakness within the eurozone. This move pressured the euro lower, with the currency trading down 0.2% against the dollar at $1.0473. The Swiss franc, however, appreciated against the dollar after the Swiss National Bank implemented a larger-than-expected 50 basis point rate cut, defying economists’ predictions of a 25 basis point reduction. Although the Swiss franc experienced short-term headwinds following the rate cut, analysts predict a long-term strengthening trend against the euro, citing the eurozone’s challenging economic outlook.
The dollar also gained ground against the Japanese yen, climbing to a two-week high of 152.845 yen before settling slightly lower at 152.525 yen. This movement comes as market participants recalibrated their expectations for a Bank of Japan (BOJ) rate hike next week. Reports suggest the BOJ is likely to maintain its current monetary policy stance, preferring to further assess international economic risks and domestic wage growth prospects. However, with market speculation now shifting towards a potential rate hike in January, the impact on the dollar-yen exchange rate remains muted.
The Australian dollar weakened against the US dollar, trading down 0.06% at $0.6365, retreating from a recent one-year low. This decline came despite Australia’s unemployment rate unexpectedly falling to an eight-month low in November, a development that diminished expectations for an interest rate cut by the Reserve Bank of Australia in February. Meanwhile, the British pound remained under pressure, slipping 0.25% to $0.577 after hitting its lowest point since November 2022 in the previous session.
Finally, the Chinese yuan traded around 7.2772 per dollar in offshore markets, following China’s announcement of expansionary fiscal and monetary policies aimed at supporting economic growth. This includes plans to increase the budget deficit, issue more government debt, and loosen monetary policy. These global currency movements highlight the complex interplay of economic data, monetary policy decisions, and market sentiment in shaping foreign exchange rates. The US dollar’s continued strength reflects its relative attractiveness in a global environment marked by varying economic performance and diverging central bank strategies.
