The U.S. dollar declined against the euro following the Federal Reserve signaling potential interest rate cuts next year. Meanwhile, the dollar edged higher against the yen as the Bank of Japan started a crucial two-day meeting on its ultra-loose stance on interest rates. The Fed's indication of the possibility of interest rate cuts next year has led to market expectations of a rate cut in March, despite some skepticism from Fed speakers. On the other hand, the European Central Bank is not expected to change its message on the need for high interest rates before its March meeting, making an earlier rate cut difficult.
Market analysts attribute the loosening of financial conditions to the Fed's failure to push back on the aggressive dovish repricing seen in recent weeks. This has led to an increase in market expectations of a rate cut in March, despite skepticism from some Fed speakers. Additionally, the Bank of Japan's potential shift in sentiment regarding its low-rates drag on the yen may impact the timing of its rate outlook, with the yen holding near recent highs. The Australian and New Zealand dollars traded near their 5-month highs against the U.S. dollar, while the pound remained supported by the prospect of higher interest rates in Britain.