- The US dollar saw its biggest sell-off so far in 2023 following the October inflation report, BofA said.
- The dollar index has slid 2% since peaking at around 107 in early October.
- Investors are expecting the Fed to start loosening monetary policy in 2024.
The drop in inflation in October fueled the biggest sell-off of the year for the US dollar, according to Bank of America strategists.
The US Dollar Index, which measures the greenback against a basket of foreign currencies, slipped around 1% from 105.53 to 104.09 throughout Tuesday. The index has slipped around 2% since it peaked around 107 in early October, marking the biggest selloff in the dollar since the start of the year.
That’s largely due to the cooler-than-expected inflation report for October, with prices in the economy rising just 3.2% year-over-year in October. Investors have raised expectations the Fed will cut interest rates sometime mid-2024. Lower rates tend to weaken the dollar as investors move out of investments like Treasurys in order to find better returns in other parts of the market.
“Today’s highly anticipated CPI print for October printed below expectations and showed further signs of disinflationary impulses amidst the trend of softening US economic data,” strategists said in a note on Tuesday. “This prompted a notable cross-market response: higher equities, lower US yields, a reassessment of Fed expectations, and the biggest sell-off of the DXY year-to date.”
“However, the DXY is not yet oversold and either a hawkish catalyst or macro risk-off scenario is needed to buy,” the bank continued.
Currency moves are not as binary as other assets, and a weaker dollar can be a positive as it makes importing goods from US companies more attractive.
Markets have been waiting for the Fed to pivot to a more dovish policy all year, after having hiked rates aggressively to lower inflation. Investors are now pricing in a 95% chance rates will be lower than their current level by the end of 2024, according to the CME FedWatch tool.