SINGAPORE, Dec 27 — The dollar remained under pressure today and the euro was close to a four-month peak, as expectations that the Federal Reserve would soon cut interest rates took hold in the market, with thin year-end flows keeping movements limited.

With many traders out for holidays, volumes are likely to be muted until the New Year.

The dollar index, which measures the US currency against six rivals, was at 101.47, just shy of the five-month low of 101.42 it touched last week.

The index is on course for a 1.9 per cent drop in 2023 after two straight years of strong gains, driven by first the anticipation of and then the actual hiking of rates by the Fed to battle inflation.

"With little to speak of on the economic calendar for this week between global holidays, we do not expect a large swing in pricing to wrap up this calendar year,” analysts at Monex USA said in a note.

The recent weakness in the dollar — the index is set to clock a second straight month of losses — has been the result of the markets anticipating rate cuts from the Fed next year, denting the appeal of the greenback.

Markets are now pricing in a 79 per cent chance of a rate cut starting in March 2024, according to CME FedWatch tool, with over 150 basis points of cuts priced in for next year.

Data showing cooling inflation has emboldened bets of easing next year.

"Disinflation is proving entrenched (and) expectations are for central banks to pivot next year while growth is still trudging along,” said Christopher Wong, a currency strategist at OCBC in Singapore.

"This paints a goldilocks market that is favourable for risk proxies.”

The Australian dollar and the New Zealand dollar both touched a fresh five-month peak earlier in the session. The Aussie last bought US$0.6828, while the kiwi was at US$0.6333.

Meanwhile, the euro was down 0.04 per cent at US$1.10385, having touched a four-month high of US$1.1045 yesterday. The single currency is up nearly 3 per cent in the year and is on course for a third straight month of gains, matching the run it had last year.

The Japanese yen weakened 0.14 per cent to 142.58 per dollar and is headed for an 8 per cent drop in the year although the Asian currency has witnessed a bout of strength in recent weeks as traders wager that the Bank of Japan will soon exit its ultra-loose policy.

A summary of opinions at the central bank’s December 18-19 meeting showed that BOJ policymakers saw the need to maintain its ultra-easy monetary policy for now, with some calling for a deeper debate on a future exit from massive stimulus.

The summary of opinions was somewhat dovish and showed no sense of urgency to end the ultra-loose policies, according to Saxo strategists.

The likely timing of the end of the policies will be later than what the market is anticipating, the Saxo strategists said in a note. ¬— Reuters