Anna 
The U.S. dollar experienced a decline against the euro on Monday, continuing its downward trend from the previous week. This decline is attributed to the pressure on the U.S. currency stemming from the Federal Reserve’s indications last week about the possibility of interest rate cuts in the coming year. The dollar showed strength against the yen, driven by the Bank of Japan’s (BOJ) ongoing two-day meeting, which holds significance in determining the central bank’s stance on interest rates.
Expectations of a potential interest rate cut by the Federal Reserve in March gained momentum last week after the central bank left its policy rate unchanged and projected a possible three-quarters of a percentage point in cuts for the next year. The market’s anticipation of a dovish approach from the Fed has led to a loosening of financial conditions.
Conversely, European Central Bank policymakers reportedly do not foresee changing their message on the need for higher interest rates before the March meeting, making any rate cut before June challenging. Market participants are monitoring central banks’ approaches amid uncertainties, with varying expectations in the U.S. and Europe.
While the Federal Reserve is not explicitly committing to imminent rate cuts, there is a disconnect between market expectations and the central bank’s functioning. Some Fed speakers have expressed the need for caution and have pushed back against the perception of an abrupt pivot to rate cuts.
The dollar index, measuring the currency against a basket of six rivals, was slightly lower at 102.55. The euro gained against the dollar, while the yen retreated but remained near recent highs. The yen has experienced volatility as investors assess the possibility of the BOJ phasing out its negative interest rate policy.
The Australian and New Zealand dollars, often linked to investor risk appetite, traded flat but remained close to their respective 5-month highs against the U.S. dollar. The pound showed a decline against the dollar, influenced by the anticipation of higher interest rates in Britain compared to other major economies in the coming year.
