The US dollar has slipped to a five-month low against the euro and several other currencies, driven by expectations that the Federal Reserve might soon implement interest rate cuts. 

(Photo : HUSSEIN FALEH/AFP via Getty Images)
A currency exchange agent counts US Dollars at his company in Iraq's southern city of Basra, on December 8, 2023. Oil-rich Iraq is hardly short of dollars: it has foreign currency reserves of more than $100 billion (93 billion euros).

US Dollar Lowest Level Since July

According to Reuters, Wednesday witnessed the dollar index, which measures the US currency against six others, falling 0.48% to 100.98. It was reportedly the lowest since July 27. 

The year 2023 has seen a 2.45% decrease in the index after two years of robust gains fueled by anticipations of interest rate hikes by the Fed, followed by its actual rate increases to combat inflation.

However, trading activity and volumes during this holiday period are expected to remain muted, as many traders will likely be out until the New Year, and price moves will be exaggerated by low liquidity.

The Federal Reserve is now perceived as dovish compared to other major central banks. Expectations for a rate cut in March heightened after Fed Chairman Jerome Powell adopted an unexpectedly dovish tone during the central bank's December meeting. 

During this meeting, policymakers projected a 75-basis-point easing next year. In contrast, other central banks like the European Central Bank (ECB) have maintained a "higher for longer stance," according to Reuters.

READ ALSO: Federal Reserve Will Begin Interest Rate Cuts in June 2024, Survey Finds

Bank of Japan Nears Ending its Negative Rate Policy

The Bank of Japan has demonstrated that it is near to ending its negative rate policy even though it is in no hurry to make a change. 

Lou Brien, a market strategist at DRW Trading in Chicago, noted that Japan would move away from its extremely low policy in the coming months. Furthermore, Brien also said the ECB had a more hawkish tone than the Fed's newfound dovishness.

The economic outlook will reportedly prompt US rate cuts. If inflation drops faster than the Fed's benchmark rate, it can reportedly tighten monetary conditions beyond Fed policymaker's intent. 

On Wednesday, the euro jumped 0.54% to $1.1102, the highest since July 27. The currency is reportedly on track to gain 3.61% this year. Sterling climbed 0.56% to $1.2793, while the US dollar dropped 0.35% to 141.89 Japanese yen but will reportedly bounce for an 8.22% gain this year.

READ MORE: Federal Reserve Poised to Cut Interest Rates 6 Times in 2024 as US Economy Slows Down: ING