THE US dollar index edged lower on Tuesday (Dec 26) as investors waited on fresh clues to when the Federal Reserve is likely to begin cutting interest rates as inflation falls closer to the US central bank’s 2 per cent annual target.

Currency moves were muted the day after Christmas, however, as markets in the UK, Australia, New Zealand and Hong Kong, among others, were still out for a public holiday. Many US traders are also out for holidays until the New Year.

The greenback is on track to post its worst performance since 2020 against a basket of currencies as anticipation of Fed rate cuts dents the appeal of the US currency relative to peers.

Many analysts expect the US economy to markedly slow in 2024, but the Fed is also expected to act to ensure that the gap between the fed funds rate and realised inflation does not widen too far. If inflation falls much faster than the Fed’s benchmark rate, it can tighten monetary conditions more than Fed policymakers intend and increase the risk of a hard economic landing.

Data on Friday showed US prices fell in November for the first in more than three-and-a-half years, pushing the annual increase in inflation further below 3 per cent and boosting expectations of an interest rate cut in March.

“The Fed has made considerable progress on inflation, as core started the year closer to an annual rate of 5 per cent, though the job is not yet done in ensuring inflation is on a sustained trajectory toward its 2 per cent target,” Wells Fargo analysts said in a note.

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The US dollar index was last down 0.04 per cent on the day at 101.59. It has fallen from a 20-year high of 114.78 on Sep 28, 2022, and is on track for a yearly loss of around 1.84 per cent.

The euro was up 0.01 per cent at US$1.1024. The single currency has risen from a 20-year low of US$0.9528 on Sep 26, 2022 and is on track for a 2.90 per cent gain this year.

The US dollar gained 0.02 per cent against the yen to 142.42. The US dollar reached a 32-year high of 151.94 yen on Oct 24, 2022, and came close to reaching this level again last month, before the Japanese currency recovered. The US dollar is on pace for an 8.63 per cent gain this year.

The yen has steadied near a recent five-month peak on the view that the Bank of Japan (BOJ) could soon mark an end to its ultra-easy policy. For most of 2022 and 2023, the policy has kept the Japanese currency under pressure as other major central banks embarked on aggressive rate-hike cycles.

BOJ governor Kazuo Ueda said on Monday the likelihood of achieving the central bank’s inflation target was “gradually rising” and it would consider changing policy if prospects of sustainably achieving the 2 per cent target increase “sufficiently”.

In cryptocurrencies, Bitcoin fell 2.20 per cent to US$42,633. REUTERS