The dollar is on pace for its worst month of 2023, dragged down by bets that the Fed is done raising interest rates

The greenback's struggles could drag on into 2024 amid signs that the central bank is set to wind down its tightening campaign.

• The US dollar is on pace for its worst month of the year.
• It's tumbled 3% in November, with investors betting that the Fed is done raising interest rates.
• The currency's struggles could drag on into 2024, according to analysts.

November has been a fantastic month for the stock market – but a dismal one for the dollar.

During a period in which the S&P 500 has climbed 8%, the greenback is on pace for its worst month of the year. The currency has been dragged down by investors betting that the Federal Reserve is set to call time on its interest-rate hikes after nearly two years of tightening.

The US Dollar Index, which tracks the buck's strength against a basket of six other currencies including the euro and the Japanese yen, has tumbled 3.3% since November 1.

According to data from Refinitiv, the losing streak has put the currency on pace for its worst month since November 2022 – when it fell 5.1% as investors fretted about a recession that hasn't yet transpired.

Fed rate pause?

The dollar has struggled this month because of the market's growing belief that interest rates won't rise any higher.

Between March 2022 and July 2023, the Fed lifted borrowing costs from near-zero to around 5.5% – and that's helped inflation cool away from four-decade highs to just 3.2% as of October.

Chair Jerome Powell signaled earlier this month that the central bank may now be ready to wind down its tightening campaign, saying in a press briefing that the main question policymakers are now asking of themselves is: "Should we hike more?"

Traders now expect the Fed to hold rates at their current level until mid-2024 before bringing in cuts over the second half of the year, according to the CME Group's Fedwatch tool.

Falling interest rates tend to be good news for stocks, bonds, and cryptocurrencies – but a bad omen for the dollar, because they mean that foreign investors looking for returns are able to find juicier yields elsewhere.

The Financial Times reported on Friday that investors have dumped the greenback at the fastest pace this year in November, citing data from State Street showing that asset managers have made "significant" sales every day since the third of the month. 

That was the day that weaker-than-expected jobs data showed that unemployment ticked up in October, which the market saw as yet another reason for the Fed to stop raising interest rates.

More pain ahead?

Analysts believe that the dollar's struggles will probably drag on into next year.

While the market is certain rate cuts are coming, forecasters are divided about how aggressively the Fed will loosen monetary policy. Earlier this month, UBS laid out a scenario where the bank slashes borrowing costs by an eye-popping 275 basis points, in order to prop up the economy after a recession hits in mid-2024.

That sort of outcome would be disastrous for the dollar – but even just a couple of rate cuts would likely sap its strength.

"Investors increasingly believe that the Federal Reserve's most aggressive interest rate hiking campaign in a generation is winding down," Nigel Green, CEO of the independent financial consultancy deVere Group, said Friday. "The dollar traditionally performs well at the start of the year, but it is likely that it will consistently weaken during the course of next year as the Fed moves to ease its grip on rates."

"As investors bet big on the Fed cutting rates, 2024 could be dubbed 'the year of the dollar dive'," he added.