The dollar index dropped 2% in 2023, snapping two years of gains

The dollar advanced on the first trading day of the year as focus turned to economic data this week that may provide clues on the Federal Reserve’s next moves, while bitcoin soared above $45,000 for the first time since April 2022.

The dollar index, which measures the U.S. currency against six peers, dropped 2% in 2023, snapping two years of gains. It was last at 101.54, up 0.158%, as investors weighed the prospect of the Federal Reserve cutting rates this year.

The dollar’s rise weighed on the Japanese yen the most, with the Asian currency 0.54% lower at 141.63 per dollar, having slipped 7% in 2023.

The question is when and how fast rate cuts will be delivered, Marc Chandler, chief market strategist at Bannockburn Global Forex, said in a note.

Moderating price pressures and weaker growth impulses have seen the pendulum of market sentiment swing dramatically from the ‘higher for longer’ mantra of most of 2023 to pricing in aggressive easing from central banks, he added.

The attention now turns to a range of economic data due this week, including the data on job openings and nonfarm payrolls. Minutes from the last Federal Reserve meeting in December are scheduled for release on Thursday and will provide insight into the central bankers’ thinking around rate cuts in 2024.

The positive sentiment from end-2023 may roll over into this week as all eyes turn to the U.S. jobs report on Friday, said Nicholas Chia, macro strategist at Standard Chartered.

At its December policy meeting, the Federal Reserve adopted an unexpectedly dovish tone and forecast 75 bps in rate cuts for 2024.

That contrasted with other major central banks, including the ECB and BoE, which reiterated they will hold rates higher for longer.

Still, traders are pricing in 158 basis points of cuts by the ECB in 2024, while the BoE is also expected to lower rates by 144 basis points this year.

The euro was down 0.2% at $1.1022, inching away from the five-month high of $1.11395 it hit last week. The currency added 3% last year, its first yearly gain since 2020.

Sterling was at $1.27105, 0.15% lower on the day, having clocked its strongest yearly performance last year since 2017 with a 5% gain.