The US dollar fell near fresh all-time lows against the Euro, as speculation of aggressive Federal Reserve interest rate cuts sunk the Greenback to further depths. Indeed, the trade-weighted dollar index plummeted to its lowest levels in nearly three months, while the euro hit heights of $1.4917 before later declines. Speculation that the US Fed would cut its short-term Fed Funds Rate ahead of its scheduled January 31 meeting forced the lion’s share of dollar losses. Markets later pulled back forecasts that the Fed would cut ahead of its upcoming meeting, but the stabilization in financial market conditions was not enough to force a worthwhile dollar rebound. In fact, a triple-digit Dow Jones Industrial Average rally effectively fueled the dollar decline; rallying risky asset classes have recently forced the opposite move in the downtrodden US dollar.
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Fed Funds Futures traders now price in a full probability of a 50 basis point interest cut through the FOMC meeting on January 30th—a clear negative for the US dollar. All else remaining equal, a drop in US yields could only sink the greenback further against major forex counterparts. This is especially the case against the euro, with traders now forecasting that the European Central Bank will either raise rates or leave them unchanged through 2008. The Reserve Bank of Australia is likewise predicted to continue raising interest rates through the same period—providing strong support for the Australian dollar. Time will tell if yield differentials will continue to be one of the main drivers behind currency market volatility, but outlook nonetheless remains very dim for the hopeless US dollar.
Written by David Rodríguez, Currency Analyst for DailyFX.com, firstname.lastname@example.org 
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