December Currency Review

After gaining slightly on Friday, the US dollar was poised to close 2023 with its first yearly loss against the euro and a basket of other currencies since 2020. This decline is attributed to expectations that the US Federal Reserve will initiate rate cuts in the coming year as inflation moderates.

 Questions for 2024 revolve around when the Fed will begin these cuts and whether they are driven by a proactive approach to prevent over-tightening or a response to a slowdown in US economic growth. The dollar’s depreciation accelerated following the Fed’s unexpectedly dovish tone and a forecast of 75 basis points in rate reductions for 2024, with markets anticipating even more aggressive cuts.


 The European Central Bank (ECB) and the Bank of England (BoE) have maintained a more hawkish stance, declaring their intentions to hold rates higher for an extended period. However, there is speculation that these banks may also shift towards a more accommodative stance due to struggling European growth and rapidly declining inflation.

 The US dollar, measured against a basket of currencies, experienced a slight uptick on Friday but remained on track to lose 2.10% for the year, marking its first yearly loss since 2020. The euro, in contrast, dipped slightly but was set to end the year with a 3.04% gain, signalling a positive performance for the first time since 2020.

 The ongoing softness of the dollar is attributed to market expectations of earlier cuts by the Federal Reserve compared to the ECB, coupled with a positive risk appetite, contributing to the dollar’s weaker outlook in the central bank meetings in March 2024.

 The ECB and the BoE held policy meetings this month without indicating immediate rate cuts. However, traders are currently pricing in a substantial 162 basis points of cuts by the ECB in the coming year, with the likelihood of two cuts by April. The BoE also anticipates making rate cuts of 148 basis points in 2024. 


 The Japanese yen stabilized near 141 per dollar, marking a challenging year with a nearly 8% decline, the third consecutive annual drop. The prolonged slump was driven by the Bank of Japan’s (BoJ) steadfast commitment to substantial stimulus measures, contrasting with other major central banks raising interest rates. However, the yen began a mid-November rally, hitting five-month highs on expectations that the US Federal Reserve would initiate rate cuts in early 2024.

 BOJ Governor Kazuo Ueda acknowledged the rising likelihood of Japan escaping the low-inflation environment and achieving the price stability target. He hinted at potential policy changes if a sustainable wage-driven rise in inflation strengthens.

 In 2023, Japan’s 10-year government bond yield surpassed 0.6%, marking its fourth consecutive annual gain amid speculation that the BoJ might end its negative interest rate policy. While Governor Kazuo Ueda recognized Japan’s gradual exit from the low-inflation environment, the bond yields retreated since November due to declining US bond yields, reflecting expectations of rate cuts by the Federal Reserve as early as March.

 At the BOJ’s December meeting, several board members emphasized a cautious approach, signaling no hurry to exit massive stimulus.


 The New Zealand dollar held steady around $0.635, poised to end the year relatively unchanged after facing persistent pressure in 2023 during the US Federal Reserve’s aggressive rate-hiking cycle. However, a late-year rally was triggered by bets that the Fed might start cutting rates early in the upcoming year due to signs of cooling US inflation. This shift in market expectations led to over five-month highs for the Kiwi. 

 Lower anticipated rates also contributed to a rise in commodity prices, providing additional support for New Zealand’s currency. New Zealand’s central bank Governor, Adrian Orr, addressed a parliamentary committee, acknowledging the “complex situation” presented by unexpectedly weak third-quarter economic data.

 The New Zealand economy contracted 0.3% in Q3, with historical growth figures revised downwards. Orr emphasized that interest rates constrain spending, expressing concern about inflationary surprises. Despite holding the official cash rate steady at 5.5% in November 2023, the RBNZ signaled the potential for further tightening if inflation persists. Orr highlighted the challenge of record-high migration levels, boosting overall spending and exerting pressure on prices, particularly in the housing market.

 Orr stated that the central bank is closely analyzing the data and considering various factors before the upcoming cash rate decision in February. He stressed the importance of upcoming key data points, including employment figures, in influencing their decision-making process. Despite the unexpected contraction in GDP, Orr noted the committee’s caution regarding inflation and the need for sustained policy adjustments if core inflation remains elevated.

 The central bank remains vigilant about potential inflationary surprises, emphasizing the long road ahead in achieving a desirable level of core inflation.


 Gold wrapped up the year on a high note, closing at $2,063 per ounce and securing a notable gain of over 13% throughout 2023, marking its first annual increase in three years. The precious metal achieved a new record high during the year, largely propelled by expectations of early interest rate cuts by major central banks.

 The US Federal Reserve, after a robust rate-hiking cycle starting in early 2022, is now anticipated to shift gears and commence easing as early as March 2024. Indications of a cooling inflationary environment in the United States drive this shift. The Fed’s dovish stance, particularly its signal of multiple rate cuts in 2024 and beyond during the December policy meeting, further solidified market expectations.

 Monetary policy shifts did not solely influence gold’s bullish trajectory. Heightened geopolitical tensions in the Middle East and the prospect of an extended conflict in Gaza increased safe-haven demand for gold. These geopolitical uncertainties added another layer of support to gold prices, highlighting the metal’s role as a traditional hedge in global instability.


 December’s outlook unveils a complex landscape, with the US dollar poised for its first yearly loss against the euro and a basket of currencies since 2020. Anticipated rate cuts by the US Federal Reserve, responding to moderated inflation, fuel questions about the timing and motivations behind these cuts. 

 Although the Eurozone maintains a hawkish stance, it faces speculation of accommodative shifts amid economic challenges. The yen’s challenging year witnessed a late rally on expectations of US rate cuts, while New Zealand’s dollar, resilient during the Fed’s rate-hiking cycle, experienced a year-end surge.

 Meanwhile, gold capped the year with a 13% gain, driven by expected rate cuts and geopolitical tensions.

 The central theme is uncertainty as major currencies navigate evolving economic landscapes and central banks grapple with pivotal decisions.

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