Dollar Tanks Three-Month Low | Daily Market Analysis

Key events:  

• Eurozone – ECB's Supervisory Board Member Jochnick Speaks     
• Eurozone – ECB's De Guindos Speaks  

The dollar weakened against all of the Big Ten currencies except the Swiss franc on Thursday. It showed a three-day decline and closed at its lowest level since August 12. 

DXY held positions at 105.80 during yesterday's trading session, consolidating after aggressive selling the day before, which resulted in the asset having to retreat to local lows again.

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The dollar's decline resumed on Wednesday after the minutes of the last U.S. Federal Reserve meeting showed that most politicians supported the idea of a rate hike slowdown. According to the CME Group FedWatch Tool, the likelihood of a 50-basis point Fed rate hike in December is now 76%.

The yield on 10-year U.S. Treasuries fell nearly 2% in this backdrop and closed the day below 3.7%. 

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Recall that in November the U.S. regulator raised the federal funds rate for the fourth time in a row by 75 basis points in reaction to rising inflationary pressures in the country. Nevertheless, the U.S. inflation rate still remains at 7.7%, well above the central bank's target of 2%.

Market participants noted the high uncertainty regarding the key interest rate cap in the U.S., despite the consensus on the appropriateness of slowing the pace of future rate hikes. San Francisco Fed President Mary Daley on Tuesday pointed to the need to continue raising the rate, saying it needs to be raised to the 4.75-5.25% range to keep inflation in check.

It is worth noting that most Fed officials now share the idea of keeping monetary policy "tight" for a long time. According to experts, markets are overly optimistic about the likelihood that the monetary tightening cycle will end soon. As soon as sentiment changes, dollar growth may resume.

Still, analysts at Goldman Sachs expect another major rise in the dollar over the next three months. An additional positive factor for the dollar is the latest report on the real estate market. Specifically, U.S. new home sales rose 7.5% in October to an annual rate of 632,000. This data followed an 11% decline in September and was much better than the 3.8% market forecast.

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At the same time, signals of slowing manufacturing activity and declining price pressures (ISM price component, ISM new orders component) as well as signals of a cooling labor market could put pressure on the dollar, shifting expectations of reaching the Fed's peak rate below 5% annually closer to the end of the first quarter of 2023. Conversely, a positive surprise from the ISM or a robust labor market could put expectations of a 2023 peak rate above 5% p.a. back on the market, providing support for the dollar. CPI data will be released the day before the rate decision. The reaction could be brighter than the outcome of the FOMC meeting. If core inflation continues to slow, we will have to revise our medium-term expectations for the dollar index range in favor of a lower range.