Investors turn attention to Fed rate cut timeline, DXY index extends decline 

The dollar extended its decline on Monday, reaching a more than two-month low as traders solidified their belief that U.S. interest rates have peaked and shifted focus to potential rate cuts by the Federal Reserve (Fed). 

The dollar index touched a low of 103.46 during European trade, marking its weakest level since September 1. This continued a nearly 2% decline from the previous week, representing the most significant weekly drop since July. 

Against the weakening greenback, the euro reached its highest point since August at $1.0937, while the yen strengthened to a 6-1/2 week high of 148.1 per dollar. 

After a series of weaker-than-expected U.S. economic indicators last week, especially below-estimate inflation readings, markets have discounted the likelihood of further rate hikes by the Fed. Attention is now focused on the potential timing of the first rate cuts, with futures indicating a nearly 30% chance that the Fed could start lowering rates as early as March, according to the CME FedWatch tool. 

“The dovish Fed narrative remains in place,” Win Thin, global head of currency strategy at Brown Brothers Harriman & Co., told Bloomberg’s Robert Brand. “There is likely to be ongoing downward pressure on US yields and the dollar,” he added. 

U.S. interest rates: Dollar weakness linked to rate cuts 

Dane Cekov, senior FX strategist at Nordea, told Reuters correspondents Samuel Indyk and Rae Wee on Monday that the dollar decline was linked to the interest rate climate: 

"The weakness in the dollar is to do with the moves in rate markets, especially after the November Fed meeting and last week's CPI. From a technical perspective, the dollar now looks oversold against the euro. Usually you'll see some sort of consolidation."  

He added that the dollar weakness may only persist in the very short term. 

USD forecast: Dollar vulnerable to selling pressure this week, say analysts 

ING’s Global Head of Markets Chris Turner spotlighted a number of downside risks for the greenback in his FX daily overview on Monday, but suggested that the DXY index had “decent support” around the 103.50 area: 

“Given the major US Thanksgiving public holiday on Thursday, we suspect this period of position-unwind can continue a little further. Inputs into FX markets this week will include second-tier US data and the release of minutes to the 1 November FOMC meeting. The market seems in the mood to look out for some dovish headlines here, and this can prove a negative dollar event risk tomorrow evening. 

DXY has decent support at 103.50, marking the 50% retracement of its rally from July. This could mark the lower boundary of this week's trading range, while the top could be the 104.40/104.50 area.” 

In their USD forecast, economists at MUFG Bank concurred with Turmer, projecting that the dollar was vulnerable to further selling this week: 

“We now believe the window for renewed US Dollar strength that we have been referring to may now have closed. US data and global growth conditions will remain key for the scope for further dollar weakness ahead. 

The US dollar remains vulnerable to further selling, certainly in the earlier part of this week both from a fundamental and technical perspective.” 

At the time of writing, the DXY index was close to 0.35% down the day, trading around the 103.50 area, as per MarketWatch data. The euro to dollar exchange rate was up 0.15% at $1.0933, while the pound to dollar rate last up 0.18% at $1.2485.