The Dollar is Ready to Edge Lower

The U.S. Dollar has been weakening since the beginning of the week, with the U.S. Dollar index (DXY) down 0.1% to 102.28 points. The decline might even be more significant as the Euro, holding the strongest weight in the currency basket against the Greenback, strengthened to the Dollar by 0.3%. However, the extremely dovish rhetoric of the Bank of Japan propelled the USDJPY by 1.6%, offsetting the overall weakness of the Dollar.

Last week proved challenging for the American currency, experiencing a 1.2% drop against the Euro, reaching 1.08950. The Greenback dropped even lower by 2.3% to 1.10090 at some point. The Federal Reserve (Fed) contributed to the Dollar's weakness with its dot plot forecast, indicating three 0.25% interest rate cuts in 2024 compared to the expected single rate cut during the Fed's September meeting. Moreover, Fed Chair Jerome Powell explicitly mentioned that the Fed is considering interest rate cuts.

This sent U.S. Treasuries yields and the Dollar sharply down, while stock indexes surged. New York Fed President John Williams cooled down investors by saying that it is too premature to think about rate cuts. His words came just in time, coinciding with the oversold tension in the Dollar and triple witching for $5.0 trillion last Friday. The Greenback has recovered some of its losses and is now consolidating before a possible further decline. The Dollar is expected to weaken in the next 3-4 weeks, or even beyond. Large investors could be looking for a sharp recovery of the Dollar, as evidenced by their increased stakes in the WisdomTree Bloomberg U.S. Dollar Bullish Fund (USDU) with the largest capital inflows since mid-January.

The U.S. final Q3 GDP data will be released on Thursday. The American economy is expected to expand by 5.2% QoQ, unchanged from November estimates. The PCE Index forecast supports the idea of a weaker Dollar. In this scenario, the EURUSD may return to the highs of last week at 1.10000. Alternatively, the recovery could be delayed to the next week.