Both the euro and Japanese yen climbed in response, with the ECB preparing to announce its policy decision later on Thursday and the Bank of Japan coming up next week

The dollar was under pressure on Thursday after the Fed’s latest economic projections suggested that the interest-rate hike cycle has come to an end and lower borrowing costs are coming in 2024.

Both the euro and Japanese yen climbed in response, with the ECB preparing to announce its policy decision later on Thursday and the Bank of Japan coming up next week.

Fed Chair Jerome Powell said at Wednesday’s FOMC meeting that the historic tightening of monetary policy is likely over, with a discussion of cuts in borrowing costs coming “into view.” Policymakers were nearly unanimous in their projections that borrowing costs would decline in 2024.

This is a huge development for markets as we head into the new year and provides much-needed clarity. And clarity in this instance meant risk-on, said Matt Simpson, senior market analyst at City Index.

The news from the Federal Open Market Committee meeting will likely overshadow upcoming economic data before personal CPI data is published next week, leaving room for “further downside potential for the US dollar,” Simpson said.

The U.S. dollar index was last 102.87 after slipping as low as 102.77 overnight.

Markets are now pricing in around a 75 per cent possibility of a rate cut in March, shows CME FedWatch tool, compared with 54 per cent a week earlier.

While recent economic releases have bolstered expectations that the Federal Reserve can achieve a soft landing for the U.S. economy, Powell kept open the option to act again if required, noting that “the economy has surprised forecasters.”

The euro was mostly flat at $1.0882 after soaring on Wednesday. Sterling was trading at $1.2623.

The yen stood significantly higher near 142.80 yen per dollar after the greenback’s overnight decline.