The dollar rebounded on Wednesday after falling on Tuesday, as traders awaited the conclusion of the Federal Reserve policy meeting later today for clues about the future of interest rates.
The U.S. dollar index, which gauges the greenback against six other currencies, rebounded by 0.12 percent, reaching 103.98 on December 13 at 2:13 AM EST, after dipping 0.31 percent overnight.
Fed officials will unveil updated economic and interest rate forecasts today. Analysts expect rates to remain unchanged, but investors intently wait to see the Fed's economic outlook.
The assessment will be crucial for shaping market expectations and investor sentiment. In particular, investors will pay attention to whether Fed Chair Powell will address the growing expectations of interest rate cuts in the first half of 2024.
"If the Fed does push back tonight on those rate cut expectations, the dollar index may have an opportunity move back into the October range of 105-107," said James Kniveton, senior corporate FX dealer at Convera.
While recent economic indicators have suggested a potential "soft landing," data released Tuesday showed unexpectedly rising consumer prices in November, particularly in rent and services. This report contradicts earlier signs of economic slowdown and may impact the Fed's upcoming policy decision and challenge investor expectations of a rate cut in 2024.
U.S. core inflation, which excludes energy and food prices, ticked up 0.3 percent in November, but the annual rate held steady at four percent. Meanwhile, the headline rate edged down to 3.1 percent, in line with expectations.
U.S. Treasury Secretary Janet Yellen remarked that recent data indicated inflation is decelerating "meaningfully," but President Joe Biden highlighted that despite the decline in the consumer price index (CPI), unemployment continued to stay below four percent.
Traders are now pricing in a 25-basis-point interest rate cut by May. This corrected expectation comes after initially anticipating a March cut, which was subsequently adjusted following stronger-than-anticipated job growth data last Friday.
"Generally we've seen sufficient progress on inflation to keep a rate cut as the next move, but it's really about the timing at this point and these numbers suggest that we still need to see some further progress on some of these underlying measures before the Fed will be comfortable cutting interest rates," said Shaun Osborne, chief foreign exchange strategist at Scotiabank in Toronto, as quoted by Reuters.
Global economy updates
Apart from the Fed decision, several global economy updates are causing the greenback to exhibit mixed performance against multiple other currencies.
Later this week, the European Central Bank, Bank of England, Norges Bank and the Swiss National Bank will make policy decisions. Norway is seen as the only country to potentially raise rates, while there's a possibility that the Swiss National Bank might reduce its support for the franc in foreign exchange markets.
With these upcoming reports on the horizon, the U.S. dollar dropped to $1.0785 after slightly gaining against the euro. It also plunged by 0.23 percent against sterling to $1.2534.
The Bank of Japan's (BOJ) upcoming policy meeting is scheduled for next week, and speculation surrounding the end of its negative rate policy has led to volatility in the yen. Despite expectations that this might happen next Tuesday, a recent Bloomberg report suggests that BOJ officials believe they are not rushing to exit the policy.
As of writing, the dollar rose 0.33 percent to 145.87 yen, following a 0.5 percent decline in the previous session.
China's yuan slightly declined following a significant meeting of the country's top leaders, which did not result in robust stimulus measures to bolster economic growth. The spot yuan traded at 7.1831 per dollar, 69 pips lower than the previous late session close.
Softer-than-expected inflation data in New Zealand also dampened the Kiwi, suggesting a potential pause in rate hikes. New Zealand's dollar dropped by 0.65 percent to $0.6093 from its earlier mark of $0.6132, while the Australian dollar slightly decreased to $0.6553.