The dollar started the new year with its biggest daily jump since March, as traders trimmed their bets on the scope of the Federal Reserve's interest rate cuts in 2024.
The Bloomberg Dollar Spot Index closed higher by more than 0.7%, yesterday, Tuesday, with US Treasury bonds and stocks declining. This is the dollar's largest single-day advance since the US domestic banking turmoil more than nine months ago.
Such a happy start to 2024 comes after a rocky run last year, when the dollar's performance was largely driven by speculation surrounding when and how much major central banks would cut key interest rates. The currency fell 2.7% last year, the worst annual performance since the Covid-19 pandemic shocked the world in 2020.
“Expectations for the Fed are still all over the map,” said Brad Bechtel, global head of foreign exchange at Jefferies. “We’ll have to see how things play out in the next few days.”
Traders are already looking forward to seeing the minutes of the Fed's December meeting on Wednesday. The minutes will provide details about the meeting in which officials signaled the end of their aggressive campaign to raise interest rates. A batch of labor market data scheduled for release later this week is expected to highlight a labor market that remains resilient, while gradually slowing.
The dollar outperformed 31 major currencies tracked by Bloomberg on Tuesday. The Norwegian krone, Swedish krone and New Zealand dollar were among the worst performers among their developed market counterparts.
While most of the greenback's decline in 2023 came as Wall Street increased its bets on an easing cycle, traders are now reconsidering the future monetary path. While central banks have signaled that the cycle of interest rate increases may be coming to an end, they will also be reluctant to abandon the fight against inflation too early.
“In the new year, the markets have not quite decided what their fundamental condition will be,” said Helen Giffen, spot FX trader at Monex USA. “We still believe that the Fed will not cut interest rates in March, and it is likely that the Fed will cut interest rates in March.” The meeting minutes prove us right.
