Here's why the dollar is facing its weakest month in a year while the euro has hit 3-month highs
- The US Dollar Index is on pace for its steepest monthly drop in a year.
- The euro, meanwhile, has jumped to its highest level versus the greenback since August, at $1.10.
The US Dollar Index, which measures the greenback against a basket of rival currencies, is on pace to weaken about 3% this month, its steepest 30-day drop since November last year.
At the same time, the euro has moved in the opposite direction, toward its highest level against the dollar since August, advancing as much as 0.4% Tuesday to reach $1.10 for its fourth consecutive day of gains.
As recently as October, the euro and dollar were nearing parity, with the former hovering at $1.05. The euro has gained about 3.6% in November.
The swing in the currencies can largely be chalked up to markets' expectations for the Federal Reserve to begin cutting interest rates in 2024. According to CME Group's FedWatch Tool, markets expect the central bank to ease monetary policy as early as March. The dollar surged in the last year as the Fed kept raising interest rates, driving investors to dollar-denominated investments like Treasurys for their higher yields.
Fed Governor Christopher Waller on Tuesday said that inflation looks on track to fall to the 2% target. That would signal mission accomplished for the US central bank, leaving the door open to begin loosening policy once economic conditions call for rate cuts.
"While I am encouraged by the early signs of moderating economic activity in the fourth quarter based on the data in hand, inflation is still too high, and it is too early to say whether the slowing we are seeing will be sustained," Waller said in a speech in Washington DC. "But I am increasingly confident that policy is currently well positioned to slow the economy and get inflation back to 2 percent."
Quincy Krosby, chief global strategist for LPL Financial, told Business Insider that Waller's comments reinforced the notion that the current restrictive policy will be enough to quell inflation.
"Strength in the euro," Krosby said, "has been gaining momentum as markets factor in that the Fed delivered a 'dovish' pivot at its last meeting. Moreover, the market, despite the Fed's 'higher for longer' commentary, sees rate cuts coming by mid-2024, which also helps underpin a weaker dollar against the euro."
The euro is also benefitting from a stronger economic picture throughout the bloc. The shared currency edged up ahead of last week's Thanksgiving holiday after data showed that a slowdown in eurozone economic activity was letting up.
Meanwhile, US consumer confidence data released Tuesday showed sentiment improved slightly in November, even as most respondents still think a recession looms.
The Conference Board's index climbed to 102 for the month, above the revised 99.1 reading last month, and slightly higher than the Dow Jones estimate of 101.