Dollar Set for Best Week in a Month on Cut-Then-Wait Fed Outlook

The US dollar has been on a tear, gaining 1.5% in the past week to reach 106.30, its best weekly performance since mid-June. This rally comes as the Federal Reserve is expected to cut interest rates by 50 basis points this month, followed by a pause in the face of persistent inflation. The dollar's strength is driven by a combination of factors, including a more dovish Fed outlook, a weaker euro due to European Central Bank rate cuts, and a rebound in risk appetite. However, the dollar's recent gains may be limited by the Fed's expected pause in rate cuts and the potential for a rebound in risk appetite.

The dollar's recent strength can be attributed to several factors. The Federal Reserve's commitment to raising interest rates has led to a shift in investor expectations, with many now anticipating a more aggressive tightening cycle. This has resulted in a more hawkish outlook for the US economy, which has boosted the dollar's appeal as a safe haven currency. Additionally, the dollar has benefited from a shift in market sentiment, with investors increasingly favoring defensive assets like the US dollar and US Treasuries over riskier investments. This has led to a surge in demand for the dollar, driving up its value against other currencies.

Geopolitical factors and global economic conditions also play a significant role in the dollar's performance. The US dollar tends to appreciate when there is uncertainty or risk in global markets, as investors seek the safety and liquidity of US assets. This is often seen during times of geopolitical tension or economic instability elsewhere in the world. Conversely, the dollar may depreciate when global markets are stable and risk appetite is high, as investors are more willing to invest in riskier assets. Additionally, the US dollar tends to strengthen when the US economy is performing well relative to other major economies, and weaken when it is underperforming. This is often reflected in the differential between US and foreign interest rates, with the dollar appreciating when US rates are higher than foreign rates and depreciating when US rates are lower.

The recent performance of the US dollar index suggests a potential trend reversal, with the dollar appreciating by 0.1095 or 0.10% to 106.2999 on Wednesday December 11 from 106.4094 in the previous session. Historically, the dollar has appreciated between 2.5 and 5 percent against most other currencies following a 100 basis point surprise increase in U.S. monetary policy expectations. This sensitivity of the dollar to changes in monetary policy expectations is also evident in the reaction of exchange rates to announcements by foreign central banks. The current strength in the dollar could be attributed to several factors, including the Fed's hawkish stance on inflation, which has led to expectations of higher interest rates and a stronger dollar. Additionally, the US economy has shown resilience, with a growth rate of 2.4% in the third quarter of 2024, compared to the 0.4% consensus estimate at the start of the year. This outperformance has likely contributed to the dollar's recent strength. However, the outlook for the dollar remains uncertain, with the potential for a trend reversal depending on various factors such as the pace of US economic growth, global economic conditions, and the Fed's policy decisions.



The US dollar has been on a tear, gaining 1.5% in the past week to reach 106.30, its best weekly performance since mid-June. This rally comes as the Federal Reserve is expected to cut interest rates by 50 basis points this month, followed by a pause in the face of persistent inflation. The dollar's strength is driven by a combination of factors, including a more dovish Fed outlook, a weaker euro due to European Central Bank rate cuts, and a rebound in risk appetite. However, the dollar's recent gains may be limited by the Fed's expected pause in rate cuts and the potential for a rebound in risk appetite.



The US dollar has appreciated by 1.5% in the past week, while the euro has depreciated by 0.5%. This differential highlights the impact of the Fed's dovish outlook and ECB rate cuts on the relative performance of the two currencies.

In conclusion, the US dollar's recent strength can be attributed to a combination of factors, including a more dovish Fed outlook, a weaker euro due to European Central Bank rate cuts, and a rebound in risk appetite. However, the dollar's recent gains may be limited by the Fed's expected pause in rate cuts and the potential for a rebound in risk appetite. The dollar is expected to trade at 106.43 by the end of this quarter, according to Trading Economics global macro models and analysts expectations.