Dollar Drops After Fed's Not-so-hawkish Cut

(RTTNews) - The six-currency Dollar Index which measures the U.S. dollar's strength against a basket of 6 currencies declined during the week ended December 12 amidst a widely expected rate cut and forward guidance by the Federal Reserve. The U.S. dollar inter alia weakened against the euro, the British pound, the Australian dollar, the Swiss franc, the Canadian dollar and the Swedish krona. It however strengthened against the Japanese yen.

The Dollar Index slipped 0.60 percent during the week ended December 12, dropping to 98.40 from 98.99 a week earlier. The weekly trading range was wider, as the Index which had touched a high of 99.31 on Tuesday declined to a low of 98.13 on Thursday.

Data released by the U.S. Bureau of Labor Statistics on Tuesday showed job openings at 7.670 million in October and 7.658 million in September versus 7.227 million in August.

The Federal Reserve on Wednesday lowered the target range for the federal funds rate by 0.25 percentage point to 3.5 to 3.75 percent. The Fed acknowledged the moderate pace of expansion in economic activity, the slowing job gains, the edging up of the unemployment rate as well as the increase in inflation and it continuing at elevated levels.

The Federal Open Markets Committee also said it would initiate purchases of shorter-term Treasury securities as needed to maintain an ample supply of reserves on an ongoing basis.

In the Summary of Economic Projections, the Fed raised the GDP growth projection for 2025 to 1.7 percent from 1.6 percent projected in September and 1.4 percent projected in June. The Fed retained the unemployment rate projection for 2025 at 4.5 percent.

Acknowledging the easing price pressures, the Fed, in its projections lowered the median PCE inflation in 2025 to 2.9 percent from 3 percent projected in September. The core component thereof was lowered to 3 percent from 3.1 percent projected in September.

Significantly, the Fed did not make any changes to its projections of the appropriate policy path. Accordingly, the current median rate of 3.6 percent is expected to be reduced to 3.4 percent by the end of 2026, implying just one quarter-percentage rate cut in 2026.

The dollar's weakness post the Fed rate cut lifted the EUR/USD pair from the week's low of 1.1615 on Tuesday to the week's high of 1.1763 on Thursday. The pair added 0.83 percent during the week ended December 12, closing at 1.1740 on Friday, versus 1.1643 a week earlier. The pair's rally was strong as the Fed's stance which was less hawkish than feared, dragged down the greenback.

The GBP/USD pair gained 0.31 percent during the week ended December 12, lifting the sterling to $1.3372, from $1.3331 a week earlier. During the week, the pair traded between the low of 1.3286 touched on Tuesday and the high of 1.3440 recorded on Thursday. Data released on Friday morning showed the British economy recording an unexpected contraction of 0.1 percent in October. Though economic growth had contracted by the same measure in September, markets had anticipated an expansion of 0.1 percent.

The Australian Dollar rose 0.20 percent against the U.S. Dollar during the week ended December 12 amidst the Dollar's Fed-led weakness and the status quo on rates by the Reserve Bank of Australia. The pair traded between a low of 0.6609 recorded on Tuesday and a high of 0.6687 touched on Wednesday but eventually closed at 0.6653. The pair was at 0.6640 a week earlier.

The USD/JPY pair rallied 0.30 percent during the week ended December 12 as it closed at 155.82 versus 155.35 a week earlier. The pair ranged between the low of 154.89 on Monday and the high of 156.96 on Tuesday. The yen's moves against the greenback came amidst ten-year Japanese government bonds touching an 18-year high during the week.

At the onset of the new week, the focus of currency markets has shifted to major central bank actions as well as the release of key economic data. The Dollar Index has slipped to 98.25 from 98.40 on Friday as markets wait for November's updates on the job market as well as consumer price inflation.

Ahead of Thursday's interest rate decision by the European Central Bank, the euro is hovering near $1.1754, rising from Friday's close of $1.1740. The pound has also rallied to $1.3388 versus Friday's close of $1.3372.

The AUD/USD pair is trading at 0.6651, not far from Friday's close of 0.6653. The USD/ JPY pair is currently at 155.10 versus 155.82 at close on Friday as markets wait anxiously for Bank of Japan's interest rate decision as well as forward guidance.