On Monday, the Canadian and Australian dollars were the focus ahead of their central bank meetings this week, while the euro and other major currencies continued to lose ground to the strengthening U.S. dollar.
With market expectations of a near-certain quarter-point rate cut by the Federal Reserve next week, analysts suggest the dollar is showing signs of fatigue after its significant rally in the four weeks since Donald Trump’s presidential victory.
Analysts at Morgan Stanley even recommend taking short positions on the U.S. dollar into the year-end, calling it a “pain trade” for markets that are heavily long on the currency.
“Much of the U.S. dollar-positive narrative is already priced in, from strong U.S. data to trade and fiscal risks, and positioning remains heavily dollar-long,” they noted.
Mizuho Bank strategist Vishnu Varathan pointed to several geopolitical events, such as the fall of Syrian President Bashar al-Assad’s regime, along with macroeconomic and Trump-related factors, providing further momentum for markets to stay long on the dollar.
“There’s no incentive to short the dollar against any particular currency,” he explained.
The dollar remained steady at around 149.93 against the yen, while the euro dropped 0.27% to $1.0537, falling below Friday’s low of $1.0542. The dollar index rose by 0.24% to 106.20.
Bitcoin, which reached a record high of $103,649 last week, was last priced at $99,515. The dollar’s rally lost momentum last week. The yen slipped just 0.16% over the week, trading within a tight range between 148.65 and 151.23. The euro experienced volatility following the collapse of France’s government but managed to recover, ending the week higher from the two-year low of $1.0332 reached at the end of November.
This week, investors are focused on the European Central Bank (ECB) policy meeting on Thursday and China’s closed-door Central Economic Work Conference.
For the ECB, a quarter-point rate cut is widely anticipated. Regarding China, analysts believe there won’t be any major stimulus announcements or targets until there is more clarity on how Donald Trump will handle trade tariffs after taking office in January.
The Bank of Canada (BoC), Reserve Bank of Australia (RBA), and Swiss National Bank (SNB) also meet this week, with significant rate cuts expected from two of these banks, potentially widening the yield differentials against their currencies.
The Canadian dollar is near a 4-1/2-year low as markets expect another substantial interest rate cut.
The RBA is the only central bank among its peers yet to begin cutting rates and is not expected to do so in December, although it may soften its growth outlook.
The Australian dollar traded at $0.6383, down 0.12%, nearing the $0.6373 four-month low hit on Friday.
This week will also be significant for the Swiss franc, with ongoing discussions about how deep the SNB’s fourth rate cut will be. Markets are leaning toward a larger 50 basis point cut and are even bracing for negative interest rates by next year.
U.S. 10-year Treasury yields stood at 4.1430%, with a decline on Friday following the November payrolls data, which strengthened the case for an additional rate cut by the Fed at its Dec. 17-18 meeting. The 10-year yield dropped to 4.126%, its lowest level since Oct. 21.
While the rate cut appears nearly certain, investors are closely watching U.S. consumer price inflation (CPI) data set to be released this week.
“A strong U.S. CPI report may not prevent a rate cut at next week’s FOMC meeting, but it could influence the level of implied cuts expected for FOMC meetings starting in March 2025, which may impact the U.S. dollar’s direction,” said Chris Weston, head of research at Australian online broker Pepperstone.
