US Dollar Retreats as Manufacturing Contraction Fuels Rate Cut Speculation

The US dollar retreated from a near four-week high on January 5, as traders shifted focus to upcoming US economic data and recalibrated expectations of Federal Reserve rate cuts. The dollar's decline follows a report by the Institute for Supply Management, which revealed that US manufacturing activity contracted more than expected in December, marking the 10th consecutive month of decline. This prolonged contraction, characterized by falling new orders and rising input costs, suggests a potential softening of the US economy that could influence monetary policy decisions by the Federal Reserve.

As traders anticipate key economic reports this week, including the closely watched employment report due on Friday, market participants are pricing in two rate cuts for the year. The dollar's valuation remains highly sensitive to shifts in these rate expectations. The dollar index, which measures the greenback against a basket of major currencies, hit its highest since December 10 but eased to close down 0.3% at 98.262. The index had lost 1.2% in December, marking its weakest performance since August.