Dollar edges lower as investors wait on clues over Fed rate-cut prospects

The dollar index edged lower on Tuesday as investors waited on fresh clues to when the Federal Reserve is likely to begin cutting interest rates as inflation falls closer to the U.S. central bank's 2% annual target.

Currency moves were muted the day after Christmas, however, as markets in the UK, Australia, New Zealand and Hong Kong, among others, were still out for a public holiday. Many U.S. traders are also out for holidays until the New Year.

The greenback is on track to post its worst performance since 2020 against a basket of currencies as anticipation of Fed rate cuts dents the appeal of the U.S. currency relative to peers.

Many analysts expect the U.S. economy to markedly slow in 2024, but the Fed is also expected to act to ensure that the gap between the fed funds rate and realized inflation doesn't widen too far.

If inflation falls much faster than the Fed's benchmark rate it can tighten monetary conditions more than Fed policymakers intend and increase the risk of a hard economic landing.

Data on Friday showed U.S. prices fell in November for the first in more than 3-1/2 years, pushing the annual increase in inflation further below 3% and boosting expectations of an interest rate cut in March.

"The Fed has made considerable progress on inflation, as core started the year closer to an annual rate of 5%, though the job is not yet done in ensuring inflation is on a sustained trajectory toward its 2% target," Wells Fargo analysts said in a note.

The dollar index was last down 0.04% on the day at 101.59. It has fallen from a 20-year high of 114.78 on Sept. 28 2022 and is pace for a yearly loss of around 1.84%.

The euro was up 0.01% at $1.1024. The single currency has risen from a 20-year low of $0.9528 on Sept. 26, 2022 and is on track for a 2.90% gain this year.

The dollar gained 0.02% against the yen to 142.42. The dollar reached a 32-year high of 151.94 yen on Oct. 24, 2022, and came close to reaching this level again last month, before the Japanese currency recovered. The dollar is on pace for a 8.63% gain this year.

The yen has steadied near a recent five-month peak on the view that the Bank of Japan (BOJ) could soon mark an end to its ultra-easy policy. For most of 2022 and 2023, the policy has kept the Japanese currency under pressure as other major central banks embarked on aggressive rate-hike cycles.

BOJ Governor Kazuo Ueda said on Monday the likelihood of achieving the central bank's inflation target was "gradually rising" and it would consider changing policy if prospects of sustainably achieving the 2% target increase "sufficiently".

In cryptocurrencies, Bitcoin fell 2.20% to $42,633.