The dollar dips as traders stay fixed on U.S. rate cuts next year. On Thursday, the dollar fell due to market speculation that the Federal Reserve will cut interest rates significantly in 2024 while avoiding a recession. The Japanese yen, euro, and pound reached their highest levels against the United States dollar in the past five months.

The dollar index, comparing the U.S. dollar to six other currencies, hit a new five-month low of 100.61. During this year, the index is expected to see a decrease of 2.7%, bringing an end to two consecutive years of significant increases.

“With little news to trade over the holidays, markets have just continued doing what they were doing previously—taking Treasury yields lower and equities higher—and, in effect, pricing the kindest of soft landings that have consequently seen the dollar continue to sell off,” according to Nick Rees, an FX analyst at Monex Europe.

The Japanese yen was the currency that moved the most during the day. The dollar reached its lowest level since July, when it was trading at 140.66 yen, a decline of up to 0.82%.

Since the yield on the benchmark 10-year United States Treasury fell by about ten basis points on Wednesday, it reached its lowest level since July. The yen is especially susceptible to changes in interest rates in the United States.

Compared to the yen in 2023, the dollar is still up more than seven percent due to movements that occurred earlier in the year. On Wednesday, the public broadcaster NHK reported that the Governor of the Bank of Japan, Kazuo Ueda, stated that he was not in a hurry to unwind ultra-loose monetary policy since the chance of inflation going beyond 2% and increasing was low.

According to the CME FedWatch tool, the possibility of reducing the United States’ interest rate in March 2024 is now priced at 88%. While the path may be rocky, futures indicate that the Federal Reserve will ease monetary policy by more than 150 basis points in the coming year.

“Markets are now looking for more than six full rate cuts from the Fed and no U.S. recession, which seems optimistic to us,” according to Rees.

“Though we could ultimately end up there, it would be very surprising if we did not see at least some hiccups in the process that aren’t”’ currently priced in, something that should see the dollar snap back when markets pick up again in January.”

During its meeting in December, the Federal Reserve took an unexpectedly dovish posture, opening the door to the possibility of rate reductions the following year. However, other major central banks, notably the European Central Bank, maintained their position that they need to keep rates higher for extended periods.

On the other hand, the markets continue to price in a rate drop from the European Central Bank of up to 165 basis points for the following year.

The euro reached a five-month high of $1.11395 earlier in the session, and it is now trading at $1.121, representing a value increase of 0.15%. The single currency is anticipated to achieve an annual gain of 3.7%, which would be its best performance since 2020.

At $1.2825, the pound’s value hit its highest since August. The pound is expected to rise about 6% in the year, which would be its highest level since 2017.

When the Swiss National Bank stopped its policy of maintaining a minimum exchange rate against the euro in January 2015, the Swiss franc strengthened to a level of 0.8339 per dollar, the highest level it had reached at that time.

The decline in the dollar’s value has also improved the currencies of developing nations. The MSCI emerging market currency index (.MIEM00000CUS) reached a new high for the first time in twenty months and was on course to complete its most successful year since 2017 with annual gains of 5%.