The US dollar weakened further on Wednesday as traders increased their bets on the Federal Reserve cutting interest rates in the new year after a top official sounded an optimistic note on the battle against inflation.
The dollar extended its losses after Fed Chair Jerome Powell said in a testimony before the Senate Banking Committee that the central bank is close to achieving its inflation goal and that it will soon consider slowing down its bond-buying program. Powell also said that the Fed is prepared to adjust its policy stance if needed, but did not give any clear indication of when it will raise interest rates again.
Powell’s remarks suggested that the Fed is not in a hurry to tighten its monetary policy, despite the recent surge in consumer prices that reached a 40-year high of 6.8% in November. The Fed has raised its benchmark interest rate by 500 basis points since March 2022, but has faced criticism from some lawmakers and market participants for being behind the curve in fighting inflation.
The market interpreted Powell’s comments as dovish, meaning that the Fed is more likely to ease its policy than to tighten it. This reduced the appeal of the dollar, which tends to benefit from higher interest rates that attract foreign investors looking for higher returns.
Dollar index drops to six-week low
The Bloomberg Dollar Spot Index, which tracks the greenback against a basket of six other major currencies, fell as much as 0.9% on Wednesday to a six-week low of 1,238.88. The index has declined by more than 1.4% since last Friday and is on track for its third consecutive quarterly loss.
The dollar weakened against most of its peers, especially the euro and the British pound, which gained from the positive developments in the European Union and the United Kingdom. The euro rose to a six-week high of 1.1468 against the dollar, boosted by the approval of the EU’s recovery fund by the European Court of Justice and the upbeat economic data from Germany and France. The pound climbed to a three-month high of 1.3626 against the dollar, supported by the easing of the Omicron variant fears and the hopes of a Brexit deal on the Northern Ireland protocol.
The dollar also lost ground against the Japanese yen and the Swiss franc, which are seen as safe-haven currencies in times of uncertainty and risk aversion. The yen strengthened to a four-month high of 112.68 against the dollar, while the franc appreciated to a six-week high of 0.9055 against the dollar. The market sentiment was dampened by the rising tensions between the US and Russia over Ukraine and the concerns over the global supply chain disruptions caused by the pandemic.
Gold prices rise on dollar weakness
The weakness of the dollar also boosted the prices of gold, which is denominated in the US currency and becomes cheaper for foreign buyers when the dollar falls. Gold prices, which topped $2,000 an ounce on Monday, rose by 0.7% on Wednesday to $2,034.50 an ounce, the highest level since September 2022.
Gold is also considered as a hedge against inflation and a store of value in times of economic and political turmoil. Analysts and experts in the sector expect gold prices to increase in 2024, driven by the strong haven buying due to the geopolitical issues and a slightly weaker US dollar.