Dollar continues to weaken to five-month low

As U.S. inflation continues to fall, the market has become more convinced that the Federal Reserve's interest rate hikes have come to an end, and discussions about starting interest rate cuts in 2024 have become more frequent. The U.S. dollar exchange rate continued to weaken, and the U.S. dollar index fell, now reaching a five-month low.

According to data from the U.S. Commodity Futures Trading Commission (CFTC), hedge funds, asset managers and other speculative market participants have increased bearish bets on the U.S. dollar. Data show that as of last week, more than 39,000 contracts were tied to expectations that the dollar would fall, an increase of more than 10,000 contracts from a week ago when the Fed was preparing to meet.

The U.S. dollar spot index has now fallen to its lowest level since July 2023. At the close on December 22, the U.S. dollar index was 101.723. The U.S. dollar weakened against a variety of currencies. As of December 25, the U.S. dollar index fluctuated at 101.6. In early October 2023, the U.S. dollar index was above 107, but since then, the U.S. dollar index has gone out of a volatile downward trend, with a decline of more than 2% so far in 2023.

U.S. economic data showed that the personal consumption expenditures (PCE) price index increased by 0.1% month-on-month in November, the first downward trend since April 2020. Year-on-year growth was 2.6%, lower than expectations of 2.8% and lower than October's 2.9%. The year-on-year increase in the core personal consumption expenditures price index, the inflation indicator that the Fed focuses on, slowed to 3.2% from the downwardly revised 3.4% in October, lower than the expected 3.3%; the month-on-month increase was 0.1%, which was less than the expected 0.2% increase. The annual inflation rate fell further below 3% in November, reinforcing market expectations for a U.S. interest rate cut in March next year.

Market analysts believe that the data has greatly increased the Fed's recent tilt towards a looser monetary policy stance. In addition, under the dual pressure of tightening monetary and fiscal policies, the market generally expects that the U.S. economy will most likely decline next year, and may even fall into a recession.

After the Federal Reserve released a "dovish" message at its December interest rate meeting, some traders even expected that the Federal Reserve would start cutting interest rates as early as March next year. According to the Chicago Mercantile Exchange (CME) "Fed Watch", the probability that the Federal Reserve will keep interest rates unchanged in the range of 5.25% to 5.50% in February next year is 83.5%, and the probability of cutting interest rates by 25 basis points is 16.5%. The probability of keeping interest rates unchanged by March next year is 6.7%, the probability of a cumulative 25 basis point interest rate cut is 78.1%, and the probability of a cumulative 50 basis point interest rate cut is 15.2%. Expectations of interest rate cuts put pressure on the U.S. dollar index.

In addition, data from the International Monetary Fund show that in the third quarter of 2023, the proportion of U.S. dollar reserves held by central banks was 59.2%, lower than the revised 59.4% in the second quarter. This is the lowest level since the fourth quarter of 2022.