On Wednesday, the U.S. dollar demonstrated strength against a basket of currencies, fueled by a late-session sell-off on Wall Street that heightened the appeal of the U.S. currency as a safe haven. Simultaneously, a significant drop in the British pound followed data revealing a sharp decline in UK inflation.
U.S. stocks closed lower after an abrupt mid-afternoon sell-off disrupted a rally driven by falling interest rates and the Federal Reserve’s dovish shift. The dollar, up by 0.28% at 102.42, aimed to break a two-day losing streak. The rebound followed a 1.5% drop in the previous week, sparked by traders anticipating multiple rate cuts in 2024, starting as early as March, after the Federal Reserve meeting.
Federal Reserve officials have since pushed back against the notion of rapid rate cuts next year, contributing to doubts in the market. Helen Given, FX Trader at Monex USA, noted that the rebound in the dollar was fueled by a safety bid for the greenback and skepticism about the Fed‘s potential swift rate cuts.
U.S. consumer confidence data on Wednesday, indicating an increase in December amid optimism about the labor market, provided additional support for the U.S. currency. Investors, however, are awaiting U.S. inflation data on Friday for insights into future Fed policy actions.
Meanwhile, the British pound faced a 0.76% decline at $1.2633, hitting a near one-week low of $1.2625. British inflation in November reached its lowest rate in over two years, leading investors to fully price in a Bank of England rate cut by May 2024 and assign a nearly 50% chance of a cut by March.
Vassili Serebriakov, foreign exchange and macro strategist at UBS, noted that several banks have adjusted their pricing for interest rate cuts, aligning with the Bank of England’s shift as inflation trends downward.
In the Eurozone, European Central Bank policymaker Joachim Nagel emphasized the need for high interest rates, cautioning traders against expecting imminent cuts. The euro dipped 0.36% to $1.0941.
The dollar fell 0.14% against the yen to 143.64 after the Bank of Japan maintained its ultra-loose monetary policy, opting to wait for additional evidence before considering a shift.
In the cryptocurrency market, Bitcoin rose by 3.26% to $43,634, its highest level since December 9. A surge in filings for spot Bitcoin and Ether ETFs, including from traditional finance heavyweights, contributed to the crypto market’s revival this year after a series of challenges in 2022.
