Anna 
The dollar held firm near a two-week high on Wednesday, while the euro struggled across various currency pairs as markets increasingly anticipate a potential interest rate cut by the European Central Bank (ECB) as early as March.
Against the dollar, the euro saw a 0.1% decline, trading at $1.0783, hitting a three-week low of $1.0775 as investors adjusted their rate expectations downward. This shift in sentiment follows soft economic data and dovish commentary from central bank officials.
The euro also marked a three-month low against the pound, a five-week low against the yen, and a 6-1/2 week low against the Swiss franc.
Niels Christensen, chief analyst at Nordea, remarked, “The story in currency markets is mostly about a softer euro,” attributing the decline to recent comments from ECB’s Isabel Schnabel that supported the market’s view of potential early rate cuts.
Schnabel, an influential policy-maker, suggested on Tuesday that further interest rate hikes could be reconsidered given a “remarkable” fall in inflation. Market sentiment has shifted, with an approximately 85% chance now being placed on the ECB cutting interest rates at the upcoming March meeting, with nearly 150 basis points of cuts priced by the end of next year.
Next week, on Thursday, the ECB will announce its interest rate decision, expected to keep rates at the current record high of 4%. Similarly, the Federal Reserve and the Bank of England are anticipated to maintain their rates steady next Wednesday and Thursday, respectively.
Fed officials, currently in a blackout period ahead of the Dec. 12-13 meeting, will focus on updated projections for rates in 2024.
CME’s FedWatch tool indicates a 60% chance of the central bank cutting rates in March, with at least 125 basis points of cuts priced for next year. However, some analysts believe that markets might have overpriced the aggressiveness of rate cuts, suggesting a potential snapback if the Fed communicates a more cautious approach.
Aninda Mitra, head of Asia macro and investment strategy at BNY Mellon Investment Management, expressed the view that the Fed might delay rate cuts until the second quarter, and even then, the cuts would likely be more modest than currently expected by the market.
A Reuters poll of foreign exchange strategists suggests that the widely anticipated rate cuts from the Fed could lead to a weakening of the dollar against other G10 currencies next year, affecting the greenback’s outlook. The dollar index, measuring the currency against six other majors, showed little change at 103.94.
In Asia, the focus shifted to China, grappling with Moody’s credit outlook downgrade. The offshore Chinese yuan rose 0.11% to $7.1661 per dollar, a day after the credit outlook was deemed “negative” by Moody’s.
Major state-owned Chinese banks increased U.S. dollar selling in response to Moody’s statement on Tuesday, continuing the trend on Wednesday. In other Asian currencies, the Japanese yen remained flat at 147.14 per dollar, while the Australian dollar and the New Zealand dollar saw gains of 0.4% and 0.5%, respectively.
In the cryptocurrency market, bitcoin eased 0.5% to $43,868, having surged above $44,000 earlier in the session. Bitcoin has experienced a 150% gain this year, fueled partly by optimism surrounding the potential approval of exchange-traded spot bitcoin funds (ETFs) by a U.S. regulator.
