Forex Dollar Falls as Market Awaits Friday's U.S. Inflation Report

US Dollar Weakens as Investors Await U.S. Inflation Report - Market Update

Dec 21, 2023 - 11:20
Dec 21, 2023 - 11:20
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Forex Dollar Falls as Market Awaits Friday's U.S. Inflation Report
Forex Dollar Falls as Market Awaits Friday's U.S. Inflation Report

The U.S. dollar has slipped to a three-day low against other currencies as the previous session's safety-driven boost wanes. Investors are now turning their attention to Friday's U.S. inflation figures for insights into future Federal Reserve policies.

Wall Street's primary indexes opened higher on Thursday, rebounding from the previous day's widespread sell-off. Investors are holding onto hopes of lower borrowing costs in the coming year.

Thursday's data revealed a slight increase in new claims for unemployment benefits, indicating underlying strength in the economy as the year concludes. Another report revised down the annualized GDP growth rate for the last quarter to 4.9%, from the previously reported 5.2%.

The Federal Reserve, in its recent meeting, maintained interest rates and signaled an end to the historic tightening of monetary policy. Lower borrowing costs are expected in 2024.

The focus now shifts to Friday's U.S. core personal consumption expenditure (PCE) index reading. A November increase of 0.1% would see the six-month annualized inflation pace slow to 2.1%, approaching the Federal Reserve's target of 2%.

Markets believe the slowdown in inflation may prompt the Fed to ease policy to prevent real rates from rising. Traders are betting on early and aggressive action.

"The U.S. dollar is the weakest major currency today amidst mixed economic data," said Matt Weller, head of market research at StoneX.

After a soft inflation reading in the UK this week, traders fear that tomorrow's U.S. core PCE report could increase the likelihood of a March interest rate cut by the Federal Reserve.

The dollar index, tracking the U.S. currency against six peers, was down 0.439% at 101.96.

Some analysts suggest that month-end rebalancing in thin trade could put pressure on the dollar in the near term.

"The US equity market outperformance through December rather suggests that passive hedge rebalancing flows will run against the USD through month end," said Shaun Osborne, chief FX strategist at Scotiabank.

The dollar was 0.83% lower against the Japanese yen after Japan's government slightly raised its economic growth projections for this fiscal year.

Risk-sensitive currencies like the Australian and New Zealand dollars traded higher on the day. Bitcoin was 0.17% higher at $43,741.

Also Read: Dollar Dips and Euro Rebounds in Forex Market Amid Rate Cut Speculations: Insights Ahead of Fed's Powell Talk

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