The US dollar experienced its most significant decline of 2023 after the release of the October inflation report, according to Bank of America. The dollar index has fallen by 2% since peaking in early October.
Bank of America strategists reported that the drop in inflation in October sparked the largest sell-off of the year for the US dollar. The US Dollar Index, which measures the dollar against a variety of foreign currencies, dropped by approximately 1%, from 105.53 to 104.09 throughout Tuesday. Since reaching a peak of around 107 in early October, the index has fallen by about 2%, marking the most substantial selloff of the dollar since the beginning of the year.
The cooler-than-expected inflation report for October, showing a 3.2% year-over-year increase in prices, drove the decline. This has led investors to anticipate that the Fed will reduce interest rates by mid-2024. Lower rates typically weaken the dollar as investors move out of investments like Treasurys in search of better returns elsewhere in the market.
Bank of America strategists stated, “Today’s highly anticipated CPI print for October printed below expectations and showed further signs of disinflationary impulses amidst the trend of softening US economic data. This prompted a notable cross-market response: higher equities, lower US yields, a reassessment of Fed expectations, and the biggest sell-off of the DXY year-to-date.” They also noted that while the DXY is not yet oversold, a hawkish catalyst or a macro risk-off scenario is necessary to buy.
Currency movements are not as straightforward as other assets, and a weaker dollar can be beneficial as it makes importing goods from US companies more appealing.
Market participants have been anticipating the Fed to shift to a more dovish policy all year, following aggressive rate hikes meant to lower inflation. According to the CME FedWatch tool, investors are now pricing in a 95% chance that rates will be lower than their current level by the end of 2024.
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