Dollar on track for biggest monthly drop in a year
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The dollar is down big this month, putting in its worst performance in a year.
Why it matters: The decline in the greenback — as measured by the U.S. dollar index — is a reflection of growing certainty in financial markets that the Federal Reserve has basically vanquished inflation and will start to cut short-term rates in 2024.
- The dollar index is down 3.6% through Nov. 28, the sharpest monthly slide since last November's 5% drop.
How it works: The Fed sets monetary policy by moving short-term interest rates up and down. Those same short-term interest rates are also big drivers of currency values.
- When central banks raise short-term interest rates, their country's currency tends to rise, all else equal.
Flashback: That's what happened in 2022. As the Fed ramped up interest rates to counter inflation, the dollar — as measured by the U.S. dollar index — soared nearly 20%.
State of play: But now inflation is down to nearly 3%, and Fed officials are sounding dovish (Tuesday it was Governor Christopher Waller), so expectations are growing that 2024 will bring rate cuts.
What they're saying: More weakness for the buck could still be yet to come, Bank of America analysts said in their recent 2024 currency outlook.
- "Our economists expect three Fed cuts next year, starting in June ... The bottom line is a soft landing in the US that allows the Fed to cut rates and helps bring the USD down from a still overvalued level," they wrote.
