The dollar index was at 101.54, just short of the five month low of 101.42 it reached last week

The dollar remained under pressure on Wednesday, while the euro hovered near a four month high, as hopes that the Federal Reserve would soon cut interest rates took hold in the market, with thin year-end flows keeping movements limited.

With traders out for holidays until the New Year, the curtailed week is likely to see muted volumes.

The dollar index, which measures the U.S. currency against six peers, was at 101.54, just short of the five month low of 101.42 it reached last week. The index is on course for a 1.9% decline in 2023 after two consecutive years of strong gains on the back of the Fed raising rates to fight inflation.

The recent weakness in the dollar has been a result of the markets expecting rate cuts from the Fed next year denting the appeal of the dollar.

Markets are now pricing in a 79% possibility of a rate cut starting in March 2024, shows the CME FedWatch tool, with 153 bps of cuts priced in for next year.

With little to speak of on the economic calendar for this week between holidays, we do not expect a large swing in pricing to wrap up this calendar year, said analysts at Monex USA.

Liquidity across the world will remain quite thin as many offices remain closed, which could give us some choppiness in markets, but largely this week is expected to remain fairly uneventful, they added.

Meanwhile, the euro was 0.07% lower to $1.1034, having hit a four month high of $1.1045 on Tuesday. The currency is around 3% higher in the year and is on course for third consecutive month of gains, matching the run it had last year.