Hopes for a stronger economy, lower inflation and a more accommodative Federal Reserve are converging to push the U.S. dollar down to multimonth lows. The greenback on Wednesday fell 0.5%, touching its lowest level since July 27 and keeping the currency on pace for its first full-year decline since the pandemic-scarred 2020. The dollar index , which measures how it compares with a basket of other global currencies, is down 2% in December, off 4.6% on the quarter and lower by 2.1% for all of the calendar year. Much of that move has come as the euro has surged 3.4% for the year. However, the British pound (5.2%), Swiss franc (8.4%) and Mexican peso (14.6%) all have posted big gains as well. One notable currency left out of the rally, though: The Chinese yuan, which has slipped about 3% this year amid concerns over the nation’s economic growth prospects. “Non-US currencies continue to strengthen versus the dollar, just as you’d think they would during a period of rising economic optimism and US/global stock prices,” Nicholas Colas, co-founder of DataTrek Research, said in his daily market note Tuesday evening. “The only odd thing is that developed economy currencies continue to rally more versus the dollar than their emerging market counterparts.” Though GDP in China grew at a healthy 4.9% annualized rate in the third quarter, concerns are rising over the real estate market, which comprises nearly one-third of all economic activity. “Our view on this dichotomy remains unchanged: global investors are still wary (and rightly so) about China’s near term economic growth,” Colas said. “The offshore yuan, which should be strengthening smartly on hopes for Fed rate cuts next year, remains stuck in neutral. This limits the gains for currencies like the won and casts a shadow on EM currencies generally.” In the U.S., Fed policy is expected to cap any potential gains by the dollar. At their meeting two weeks ago, central bankers penciled in three quarter-percentage point rate cuts in 2024, and the market is betting that the Fed outlook is conservative. Traders in the fed funds futures markets are pricing in at least six cuts next year, which would take the benchmark rate down to a target range of 3.75%-4%.
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