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Dollar Falls as Market Prices in Rate Cut by May

The U.S. dollar experienced a decline against the euro and yen on Thursday as investors continued to anticipate a potential interest rate cut by the Federal Reserve. This sentiment persisted even after Federal Reserve Chairman Jerome Powell stated that a rate cut in March was unlikely.

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Powell emphasized that rates had peaked and would decrease in the coming months, citing a decline in inflation and expectations of sustained job and economic growth. Despite this, he did not firmly commit to a “soft landing” for the economy or promise an immediate rate cut in March.

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The dollar initially strengthened following Powell’s comments but weakened on Thursday ahead of crucial jobs data scheduled for Friday. Traders are currently pricing in a 39% probability of a rate cut in March and a 94% chance of a rate reduction by May, according to the CME Group’s FedWatch Tool.

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Market analysts noted a reluctance among central bankers to fully endorse the market’s expectations for rate cuts. While Powell indicated that a rate cut in March is not the “base case,” traders continued to adjust their expectations for the first rate cut to subsequent meetings.

The dollar index was down 0.55% at 103.04, influenced by declining Treasury yields amid concerns over U.S. regional banks. Renewed jitters in the banking sector led to a sell-off in bank shares. The Japanese yen, considered a safe haven, gained against the dollar.

The Bank of England (BoE) took a slightly more hawkish stance, dropping its warning about “further tightening” while indicating that more evidence of inflation falling to the 2% target is needed before considering rate cuts. The BoE’s approach contrasts with hints of rate cuts from the European Central Bank and the Federal Reserve.

In terms of currency movements, sterling gained 0.46% against the dollar, while the euro rose 0.5% to $1.08720. The euro had earlier dropped to $1.07800, the lowest level since December 13, influenced by expectations that the U.S. economy would fare better than the eurozone.

The Swedish Riksbank kept its key interest rate unchanged at 4.00%, indicating the possibility of a rate cut in the first half of 2024 if inflation continued to slow.

Overall, the currency market is navigating uncertainties tied to potential rate cuts, economic performance, and geopolitical factors.

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