LONDON: The dollar remained close to a two-week high on Wednesday, while the euro faced weakness across the board as markets increasingly bet on the European Central Bank cutting interest rates as early as March.
The euro dipped 0.1% against the dollar, reaching $1.0783, after touching a three-week low of $1.0775. This shift comes as markets adjust rate expectations downward following soft data and dovish central bank commentary. The single currency also hit a three-month low against the pound, a five-week low versus the yen, and a 6-1/2 week low against the Swiss franc.
Niels Christensen, chief analyst at Nordea, noted, "The story in currency markets is mostly about a softer euro. Yesterday's comments from ECB's Schnabel supported the market view of early rate cuts." Influential policy-maker Isabel Schnabel suggested on Tuesday that further interest rate hikes could be off the table due to a "remarkable" fall in inflation. Markets now project an 85% chance of the ECB cutting interest rates at the March meeting, with almost 150 basis points of cuts priced by the end of next year.
The ECB will set interest rates on Thursday next week and is expected to leave them at the current record high of 4%. The Federal Reserve and Bank of England are also likely to hold rates steady next Wednesday and Thursday, respectively.
As Fed officials enter a blackout period ahead of the Dec. 12-13 meeting, traders have priced around a 60% chance of the central bank cutting rates in March, according to CME's FedWatch tool. Investors have been reassessing U.S. rate cut expectations, contributing to a lift in the dollar.
Aninda Mitra, Head of Asia Macro and Investment Strategy at BNY Mellon Investment Management, cautioned that markets might have gone overboard in pricing a very aggressive path of rate cuts through next year. Mitra believes the Fed might hold off until the second quarter, and even then, the cuts would likely be shallower than what the market anticipates.
The expected rate cuts from the Fed could result in the dollar loosening its grip on other G10 currencies next year, according to a Reuters poll of foreign exchange strategists. The dollar index, measuring the currency against six other majors, remained little changed at 103.94.
In Asia, attention turned to China as markets reacted to rating agency Moody's cut to the Asian giant's credit outlook. The offshore Chinese yuan rose 0.11% to $7.1661 per dollar, a day after Moody's cut China's credit outlook to "negative." China's major state-owned banks continued forceful U.S. dollar selling on Wednesday morning.
Elsewhere in Asia, the Japanese yen held flat at 147.14 per dollar. The Australian dollar rose 0.4% to $0.6581, while the New Zealand dollar rose 0.5% to $0.6157.
In cryptocurrencies, bitcoin eased 0.5% to $43,868, having surged above $44,000 earlier in the session. The world's largest cryptocurrency has gained 150% this year, fueled in part by optimism that a U.S. regulator will soon approve exchange-traded spot bitcoin funds (ETFs).__Reuters
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