The dollar's position in the global market is undergoing a notable shift. As the fundamentals remain strong in its favor, the prospect of interest rate cuts by the Federal Reserve's main competitors is reshaping expectations. This year, the Fed's rivals are poised to reduce their rates two to four times, while the United States might see only one rate cut. The dollar reached its peak when markets anticipated the most hawkish outlook for key rates. Initially, there was a 32% probability that the key rate would not be reduced before year's end. However, this probability has since decreased to 14%, influencing the dollar index and the attractiveness of dollar-denominated assets.
The elevated key rate has made assets tied to the dollar more appealing compared to those denominated in euros, pounds, yen, and Canadian dollars. This shift has affected the dollar index, which started the week touching the 110 level on the DXY, marking a two-year high. Despite being under pressure for most of the week, the dollar's strength has prompted a reassessment of its market standing. Meanwhile, US indices seemed to reach an inflection point at the week's start, influenced by changing investor expectations.
Gold prices have also felt the impact of these dynamics. The daily strengthening of the Greenback has led to a partial retreat in gold's weekly gains. By week's end, gold prices had slipped back near the $2,700 region per troy ounce. The strengthened dollar has been a significant factor in this decline, particularly as it continues to exert influence over market sentiment.
In contrast, the S&P500 was initially stalled in early December due to concerns about a robust labor market. These fears contributed to a subsequent downturn in the index. Investors are closely monitoring these developments as they navigate shifting economic conditions.