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  • Writer's pictureSieracki Milosz

US Dollar Weakens: Impact, Analysis, and Outlook


Impact, Analysis and Outlook Us dollar
The Weakening of the US Dollar: Implications and Insights

The US Dollar, often considered the backbone of the global economy, has seen a significant decline in its value against its major rivals. This downturn follows the Federal Reserve's latest event, and it's a topic that has experts and analysts closely scrutinizing its impact and implications.


Federal Reserve's Decision

The Federal Reserve, in its most recent policy meeting, made a notable decision. As widely expected, they chose to leave the policy rate unchanged, maintaining it in the range of 5.25% to 5.5%. However, it was the additional information provided that caught the markets off guard. The revised Summary of Economic Projections revealed that officials' median view of the policy rate at the end of 2024 stood at 4.6%. This projection implied a total rate reduction of 75 basis points over the next year.


The most significant moment came during the post-meeting press conference when Chairman Jerome Powell made a statement that sent shockwaves through the financial world. Powell acknowledged that policymakers were actively considering when it might be appropriate to start cutting the interest rate. His words were clear: "We are very focused on not making the mistake of keeping rates too high too long." These dovish comments signaled a significant shift in the Fed's stance towards monetary policy.


Impact on US Yields

The market reaction to these dovish remarks and the revised projections was swift and dramatic. US yields, especially the benchmark 10-year US Treasury bond, experienced a sharp decline. On the day following the announcement, the 10-year US yield lost more than 4%, extending its losses into the early hours of the following day. This decline in yields added further pressure on the US Dollar, which had already taken a hit.


As of the most recent data, the 10-year US yield had fallen to its lowest level since early August, dipping below 4%. Simultaneously, the US Dollar Index, which measures the value of the USD against a basket of major currencies, fell by nearly 1% on the day after the Fed's announcement, settling at 102.60.


Global Factors

While the Fed's decision was a significant catalyst for the USD's decline, other global factors have also played a role in this development. The Swiss National Bank (SNB), the Bank of England (BoE), and the European Central Bank (ECB) were all scheduled to announce their monetary policy decisions on the same day as the Fed's announcement. These decisions can have a significant impact on currency markets and further affect the USD's standing.


Additionally, economic data from other countries has contributed to the shifting currency dynamics. During Asian trading hours, Australia reported an Employment Change of +61.5K in November, well above market expectations of 11K. The Reserve Bank of Australia (RBA) also reported a decline in Consumer Inflation Expectations to 4.5% in December from 4.9%. These positive figures supported the Australian Dollar (AUD), which saw an upsurge, reaching its highest level since late July, trading above 0.6700 against the USD.


European Factors

In Europe, the Euro (EUR) made significant gains against the USD, breaking out of its recent trading range and surpassing the 1.0900 level. Market participants are closely watching the ECB's monetary policy decision, with key rates expected to remain unchanged. Additionally, updated economic projections from the ECB will provide valuable insights into the European economic outlook.


The British Pound (GBP) also experienced a boost, gaining more than 50 pips and stabilizing around 1.2650 against the USD. The Bank of England (BoE) is expected to maintain its current policy stance, and the vote split among policymakers will be closely observed, although there won't be a press conference following the announcement.


Other Currency Movements

The USD's weakening was not limited to the Euro and the Pound. The Japanese Yen (JPY) saw a sharp decline, with USD/JPY breaking below 142.00. At the time of writing, the pair had declined nearly another 1% on the day, trading at around 141.50.

In the precious metals market, both Gold (XAU) and Silver (XAG) experienced significant movements. Gold surged above $2,000 following the decline in US yields, while Silver crossed the $24 threshold, currently priced at $24.14.


Crude Oil and Natural Gas

Shifting our focus to commodities, West Texas Intermediate (WTI) crude oil prices extended their gains for the second consecutive day, trading higher around $70.00 per barrel during the Asian session on Thursday. This upward movement followed the release of the US EIA Crude Oil Stocks Change data for the week ending on December 8, along with the Federal Reserve's decision to hold interest rates at 5.5%, in line with market expectations.

Natural Gas prices, on the other hand, are trading at $2.3490 per MMBtu at the time of writing, reflecting the ongoing dynamics in the energy market.


Conclusion

In conclusion, the recent developments in the financial markets, particularly the weakening of the US Dollar, have set the stage for a new phase in global finance. The Federal Reserve's dovish stance, combined with other global factors and economic data releases, has contributed to these significant currency movements.


As we move forward, it will be essential to closely monitor central bank decisions, economic data releases, and global events to gain a comprehensive understanding of how these factors will continue to shape the financial landscape. The world of finance is ever-changing, and staying informed is the key to making well-informed investment decisions.


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