Expectations of possible interest rate cuts by the Federal Reserve pushed the US dollar to a five-month trough against the euro and other currencies on Wednesday.

The U.S. currency reached its lowest level since July 27 against six other currencies, dropping 0.48 per cent to 100.98 on the dollar index. The holiday season caused less trading and more volatility because of low liquidity, but the dollar is still expected to fall 2.45 per cent in 2023. This is a change from the strong gains in the past two years, which were fueled by expected and actual interest rate increases by the Fed to fight inflation.

The market thinks that the Federal Reserve is more dovish than other major central banks, which makes them expect possible rate cuts. This change in mood happened after Fed Chairman Jerome Powell surprised everyone with a dovish view at the December meeting of the central bank.

Policymakers expect to lower interest rates by 0.75 per cent in 2024. On the other hand, central banks like the ECB have kept a “high for long” policy, while the Bank of Japan has indicated a possible end to its negative interest rates.

The euro rose by 0.54 per cent to $1.1102, the highest since July 27. The single currency is set to increase by 3.61 per cent for the year. The British pound also went up by 0.56 per cent to $1.2793, reaching $1.2802 earlier, the highest since August 10. Sterling is expected to gain 5.79 per cent in 2023.

The Japanese yen fell by 0.35 per cent to 141.89 against the dollar, but the dollar is expected to rise by 8.22 per cent for the year. The Bank of Japan recently announced that it would buy fewer bonds in the first quarter of 2023, and policymakers stressed the importance of keeping the current policy while suggesting future talks on an exit from huge stimulus.

The Australian and New Zealand dollars also hit more than five-month peaks during the session, with the Australian dollar increasing by 0.21 per cent to $0.6841, and the kiwi rising by 0.10 per cent to $0.6335.