Dollar Edges Lower Amid Fed Cut Expectations and Global Uncertainty
The US dollar experienced a slight decline on Monday, influenced by expectations of another Federal Reserve interest rate cut this month following last week’s jobs report. However, the currency’s losses were limited due to renewed uncertainties in the Middle East, further fueling its safe-haven appeal. The Dollar Index, a measure of the greenback’s value against a basket of six other currencies, dipped 0.1% to 105.550. While the dollar has rallied significantly since Donald Trump’s presidential victory, this upward momentum appears to be waning as the year concludes. Market analysts anticipate a further interest rate cut by the Fed next week, even with the observed rebound in November’s jobs growth. This expectation stems from the belief that much of the positive news bolstering the dollar, including robust US data and assessments of trade and fiscal risks, is already factored into the current price. Furthermore, market positioning currently reflects a substantial long dollar bias.
Despite these factors, the dollar’s decline over the past week has been minimal, limited to less than 0.5%, underpinned by its safe-haven status amid escalating geopolitical tensions. The volatile situation in the Middle East, with rebel forces reportedly ousting Syrian President Bashar al-Assad and taking control of Damascus, adds to the global unease. The ongoing conflict between Ukraine and Russia continues to be a source of concern, while political instability in South Korea, a key player in the East Asian economy, further contributes to the demand for safe-haven assets like the US dollar. These combined factors support the view that the dollar’s bull trend may resume after a period of consolidation. Upcoming US inflation data for November, due on Wednesday, will likely provide further clues about the Federal Reserve’s future interest rate trajectory.
Across the Atlantic, the euro gained slightly against the dollar, reaching 1.0579, as traders await the European Central Bank’s (ECB) final policy meeting of the year on Thursday. The market widely anticipates a further 25-basis-point rate cut, the fourth such reduction this year. Although Eurozone inflation edged higher in November, it remains on track towards the ECB’s 2% target, with indications of easing wage pressures. The ECB faces a challenging environment, marked by increased tariff risks following Trump’s election victory, political turmoil in France and Germany, a sharp slowdown in business activity, and a weakened euro. These factors collectively present a less-than-optimistic outlook for the ECB, despite relatively resilient hard economic data.
The British pound also held its ground against the dollar, trading at 1.2776, as the Bank of England grapples with persistently high inflation. UK inflation reached 2.3% in the year to October, exceeding the Bank of England’s target. Having already cut rates twice in 2024, the UK central bank is expected to pursue a more gradual easing of monetary policy compared to other major central banks in 2025.
In Asia, the Japanese yen strengthened against the dollar following revised data showing slightly better-than-expected economic growth in the third quarter. However, this growth figure remains significantly below the previous quarter’s increase, and market sentiment is divided on whether the Bank of Japan will raise interest rates next week. Meanwhile, the Chinese yuan saw a marginal gain after data revealed a larger-than-expected contraction in Chinese imports in November, despite recent stimulus measures. Producer price inflation also remained subdued. This week, attention will focus on China’s annual Central Economic Work Conference for indications of further stimulus from the People’s Bank of China.
The Australian dollar appreciated against the US dollar ahead of Tuesday’s Reserve Bank of Australia’s rate decision. While the central bank is expected to maintain its current interest rate stance, it may moderate its hawkish tone given signs of weakening economic conditions in Australia. Finally, the South Korean won climbed near a two-year high as the country’s political crisis deepened. Prosecutors launched a criminal investigation into President Yoon Suk Yeol following his unsuccessful attempt to impose martial law last week. While Yoon survived an impeachment vote, the leader of his own party suggested his eventual resignation. These developments contribute to the volatile and uncertain global landscape influencing currency markets.
