The U.S. dollar continued its downward trend on Monday, marking its most significant decline since July last week.
This decline was primarily driven by the Federal Reserve’s shift to a less hawkish stance and signs of economic moderation in the United States.
The dollar index slipped by 0.2% to reach 104.85, its lowest level in 6-1/2 weeks, following a 1.4% drop the previous week. Meanwhile, the euro strengthened by 0.2% to reach a 7-1/2 week high of $1.0756.
Global stock markets also experienced their strongest week in a year, as expectations grew that the Fed would refrain from further interest rate hikes.
Several factors contributed to the dollar’s decline. Weakness in U.S. jobs data, softer manufacturing numbers, and a decrease in longer-dated Treasury yields all weighed on the dollar’s performance.
These developments also fueled rallies in the British pound and the Australian dollar, while causing the Japanese yen to rebound from levels weaker than 150 per dollar.
Market analysts, such as Tina Teng from CMC Markets, noted that the market often interprets bad news as good news because it raises expectations for central banks, including the Fed, to halt their rate hike cycles sooner. Teng expected the dollar to remain on a weaker trajectory throughout November.
Dane Cekov, a senior FX strategist at Nordea, called last week’s market movements an “overreaction,” emphasizing that the U.S. jobs data was a mixed bag.
While a somewhat weaker dollar in the short-term is possible, it may require additional factors to sustain the euro-dollar rally.
JPMorgan analysts highlighted the need for signs of improvement in the eurozone, China, and other regions to support a sustained dollar selloff, which they considered “still tenuous.”
Treasury yields declined in response to the softer U.S. economic data, and Fed Chair Jerome Powell’s remarks about ‘balanced’ risks.
Furthermore, the U.S. government reduced its refinancing estimate for the quarter and announced lower increases in long-dated debt auctions than anticipated.
Futures markets implied a 90% chance that the Fed had concluded its rate-hiking cycle, with an 86% probability that the first policy easing would occur as early as June.
Additionally, there was an 80% likelihood that the European Central Bank would cut rates by April, while the Bank of England was expected to ease in August.
In the cryptocurrency market, bitcoin remained stable at $34,974, benefiting from the anticipated end of central bank policy tightening cycles.
The prospect of new spot bitcoin exchange-traded funds (ETFs) also garnered attention, although none had been approved at the time.
Several firms had filed for such a product, which could potentially expand the market’s accessibility to more investors.