The dollar fell on Wednesday to its lowest level in five months, while the euro touched its highest level in four months, amid expectations that the Federal Reserve (US Central) will cut interest rates soon, but thin flows at the end of the year kept trading volume limited.
The week is likely to witness weak trading as traders around the world spend holidays until the beginning of the new year.
The dollar index, which measures the performance of the US currency against six competing currencies, fell to 101.41 points, the lowest level since July 28. The index is heading towards a 1.9 percent decline in 2023 after two consecutive years of strong gains against the backdrop of the US Central Bank raising interest rates to fight inflation.
The index is also heading to incur losses for the second month in a row.
The recent decline in the dollar is a result of markets expecting the Federal Reserve to reduce interest rates next year, which will affect the attractiveness of the US currency.
Markets now expect an 85 percent chance of interest rates being cut starting in March 2024, according to CME Group's Fed Watch service. It also expects a reduction of more than 150 basis points next year.
Meanwhile, the euro rose 0.1 percent to $1.1053 after touching a four-month high of $1.1055.
The single European currency rose nearly three percent during the year and is on its way to achieving gains for the third month in a row, which is consistent with the rise it achieved last year.
The Japanese yen fell 0.1 percent to 142.52 per dollar, and is heading down eight percent during the year despite its strength in recent weeks, with traders betting that the central bank will soon abandon its ultra-easy monetary policy.
A summary of the Bank of Japan's December 18-19 meeting showed that the bank's policymakers see the need to maintain ultra-loose monetary policy for the time being, and some of them called for a deeper discussion about abandoning this policy in the future.
The Australian dollar and New Zealand dollar reached a new five-month peak earlier in the session. The Australian dollar last traded at $0.6836, while the New Zealand dollar reached $0.6324.
