The U.S. dollar was at a two-week high on Wednesday, while the euro was weak across the board as markets ramped up bets that the European Central Bank (ECB) will cut interest rates as early as March.
Although markets are still pricing at least 125 basis points of interest rate cuts from the U.S. Federal Reserve next year, the dollar was able to hold steady as rate cut bets for other central banks intensified.
The dollar index, which measures the currency against six other majors, was last up 0.12% at 104.18. The euro was down 0.29% to $1.0764.
Traders are betting that there is around an 85% chance that the ECB cuts interest rates at the March meeting, with almost 150 basis points worth of cuts priced by the end of next year. Influential ECB policymaker Isabel Schnabel on Tuesday told Reuters that further interest rate hikes could be taken off the table given a “remarkable” fall in inflation.
The euro also touched a three-month low against the pound , a five-week low versus the yen and a 6-1/2 week low against the Swiss franc.
“It’s a reasonably sized sell-off and the market is trying to digest, is it just a correction? Did the market get over-exuberant in the previous weeks? I think there is definitely an element of that,” said Amo Sahota, director at FX consulting firm Klarity FX in San Francisco.
‘A BIT OVERBOARD’
The ECB will set interest rates on Thursday next week and is all but certain to leave them at the current record high of 4%. The Fed and Bank of England are also likely to hold rates steady next Wednesday and Thursday respectively.
The Bank of Canada on Wednesday held its key overnight rate at 5% and, in contrast to its peers, left the door open to another hike, saying it was still concerned about inflation.
Traders have priced around a 60% chance of the U.S. central bank cutting rates in March, according to CME’s FedWatch tool.
“Markets have aggressively priced in rate cuts, without any kind of confirmation from central banks,” said Adam Button, chief currency analyst at ForexLive in Toronto. “As December continues, we need either a change in tune from central bankers or a repricing in markets.”
If the Fed were to cut rates as markets expect, it could result in the dollar loosening its grip on other G10 currencies next year, dimming the outlook for the greenback, according to a Reuters poll of foreign exchange strategists.
The spotlight in Asia was on China, as markets grappled with rating agency Moody’s cut to the Asian giant’s credit outlook.
The offshore Chinese yuan was up 0.18% at $7.159 per dollar, a day after Moody’s cut China’s credit outlook to “negative”.
China’s major state-owned banks stepped up U.S. dollar selling forcefully after the Moody’s statement on Tuesday, and they continued to sell the greenback on Wednesday morning, Reuters reported.
Elsewhere in Asia, the Japanese yen strengthened 0.14% versus the greenback at 147.36 per dollar.