U.S. dollar retreats lower ahead of Fed rate hike decision

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Vrasidas Neofytou
Head of Investment Research

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U.S. dollar retreats lower ahead of Fed rate hike decision

U.S. dollar falls across the board as investors have scaled back expectations for an aggressive 50-basis-point interest rate hike from the Federal Reserve at its March 22 monetary policy meeting following the recent turmoil in the banking and financial markets.

The collapse of the two U.S-based small (regional) banks of Silicon Valley and Signature, and the recent state-backed rescue of embattled lender Credit Suisse by rival UBS, have increased the odds of the Federal Reserve pausing hikes or raising rates at a slower pace on Wednesday.

Ahead of the FOMC decision on monetary policy on Wednesday, forex traders are leaning towards a 25-basis-point rate hike, with nearly 20% expecting a pause, as per CME Group's Fedwatch tool, while the market expects rate cuts may begin in the summer.

Following the recent negative sentiment for the greenback, the DXY-U.S. dollar index which tracks its value against six major peers fell to a monthly low of 103 level, much lower than its 2022’s high of 114, which hit at the end of September.

Adding further pressure on the dollar, the yields on the 2-year and 10-year bonds also have fallen to intraday six-month lows of 3.65% and 3.30% respectively on expectations for lower rate hikes by Fed.

EUR/USD pair, Daily chart

The softening dollar has boosted other major peers, with EUR/USD pair posting higher highs above $1.07 and rolling toward the 1.08 psychological level.

Japanese Yen has added on last week’s gains, with the USD/JPY pair falling to nearly ¥131 level, its lowest since mid-February.

A similar story is shown on the antipodean currencies Australian and New Zealand dollars, with the AUD/USD pair recovering toward $0.68 while the NZD/USD pair is surging above $0.6250.

 

 

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