US dollar drops to weakest since August as traders eye Fed pivot

THE US dollar dropped to a four-month low on Thursday (Dec 14) as traders digested the clearest signal yet that the Federal Reserve’s aggressive hiking campaign is over.

The Bloomberg Dollar Spot Index dropped 0.3 per cent to its lowest since August, extending losses from Wednesday after Fed officials pencilled in a sharper pace of rate cuts than they had seen in September. The US central bank kept rates steady for a third consecutive time.

While chair Jerome Powell indicated they are still prepared to hike again if price pressures return, Fed officials have pretty much signalled the end of the tightening cycle. Policymakers are now turning their focus to when to start cutting rates as inflation continues its descent towards their 2 per cent goal, Powell said.

“The decisive Fed pivot to rate cuts has pretty comprehensively undercut near-term US dollar prospects,” Richard Franulovich, head of FX strategy at Westpac Banking in Sydney, wrote in a note to clients. “While the door is now wide open to the long awaited big turn in the dollar we still think it is going to take time to develop.”

So-called group-of-10 currencies all advanced versus the greenback on Thursday, with the Australian dollar and the yen both rallying more than 0.5 per cent. Asian currencies rose across the broad, with the Korean won and Thai baht climbing nearly 2 per cent.

The US dollar is on track for its second-consecutive monthly loss after notching its biggest monthly drop in a year in November – a decline of about 3 per cent. The currency’s path will depend on the speed of rate reductions telegraphed by other major central banks as the fight against inflation is weighed against economic fragility. BLOOMBERG