The US Dollar Index (DXY), which tracks the USD against six major currencies, dropped below the 106.00 mark during the Asian session on Friday, with 2-year and 10-year US Treasury yields at 4.21% and 4.23%, respectively. This marks a continuation of downward pressure on the US Dollar, driven by falling Treasury yields.
The decline in bond yields follows President-elect Donald Trump’s appointment of Scott Bessent, a Wall Street veteran and fiscal conservative, as the next US Treasury Secretary. His nomination has fueled expectations that the US government will adopt a more cautious approach toward fiscal policy, leading to rising bond prices and, in turn, pushing yields lower.
Fed‘s Rate Outlook Weighs on USD
Markets are closely watching upcoming US economic data for further indications of the Federal Reserve’s (Fed) monetary policy stance. On Wednesday, the release of October’s core Personal Consumption Expenditures (PCE) prices met expectations, which kept investor hopes alive for another rate cut by the Fed in December. However, other economic reports have pointed to a resilient economy, leading some analysts to believe that the central bank may adopt a more cautious approach in 2024.
Minutes from the Federal Open Market Committee’s (FOMC) November 7 policy meeting revealed that Fed officials are exercising caution when considering additional rate cuts, citing both easing inflation and a strong labor market as factors influencing their decision-making.
Market Expectations for December Rate Cut
According to the CME FedWatch Tool, futures traders are now pricing in a 66.5% probability of a 25 basis point rate cut in December, up from 55.9% a week ago. However, the market currently expects the Fed to keep rates unchanged during its January and March meetings, reflecting growing uncertainty about the Fed’s path forward.
As markets anticipate further US data, the outlook for the US Dollar will remain closely tied to expectations regarding the Fed’s next move, with ongoing shifts in Treasury yields providing key clues about the broader economic environment.
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