Dollar Rally Paused as U.S. Inflation Expectations Decline

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The U.S. dollar rally faced a pause on Tuesday as a decline in U.S. consumer inflation expectations influenced traders’ bets for potential Federal Reserve rate cuts this year. In the cryptocurrency market, bitcoin maintained its strength near levels not seen since April 2022, driven by anticipation of the imminent approval of spot bitcoin exchange-traded funds (ETF) by the Securities and Exchange Commission (SEC).

Key Points:

  • Inflation Expectations Impacting Dollar:
    • The New York Fed’s Survey of Consumer Expectations showed a drop in U.S. consumers’ short-term inflation projections to the lowest level in nearly three years in December.
    • Traders reinforced their expectations for multiple Federal Reserve rate cuts in response to disinflationary impulses and a perceived capacity for the Fed to ease rates.
  • Cryptocurrency Strength:
    • Bitcoin held near its highest level since April 2022, driven by growing anticipation of SEC approval for spot bitcoin ETFs.
    • Investment managers disclosed fees for proposed spot bitcoin ETFs, contributing to positive sentiment among investors.
  • Market Dynamics:
    • Futures indicate approximately 135 basis points of easing priced in for the Fed in 2024, with a 60% chance of rate cuts starting in March.
    • The U.S. dollar index, measuring the currency against a basket of six currencies, remained stable, having risen 1% in the previous week.
    • The euro and sterling showed minor fluctuations, while the Japanese yen was little changed, and the Australian and New Zealand dollars experienced modest declines.
  • Cryptocurrency and SEC Approval:
    • Bitcoin traded at $46,713, near a 21-month high, with heightened expectations of SEC approval for spot bitcoin ETFs.
    • Investment managers’ disclosure of fees added to positive sentiments, but caution was advised, suggesting a potential “sell the news” reaction on a positive outcome.
  • Ether Performance:
    • Ether, the second-largest cryptocurrency, fell 1.4% to $2,299 amid broader market dynamics and fluctuations in the cryptocurrency space.

The pause in the U.S. dollar rally was influenced by declining U.S. consumer inflation expectations, prompting traders to adjust their bets for potential Federal Reserve rate cuts. In the cryptocurrency market, bitcoin’s strength continued, driven by optimism surrounding the imminent SEC approval of spot bitcoin ETFs. Market dynamics and expectations for central bank actions remained key factors influencing both traditional and digital currency markets.

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