The U.S. dollar, measured by the DXY index, showed a slight softening on Tuesday, declining by approximately 0.35% to 102.13. This dip can be attributed to the ongoing retreat in Treasury yields, a trend that commenced after the Federal Reserve’s pivot last Wednesday.

In the broader context, the Fed adopted a more optimistic stance on the inflation outlook during its December monetary policy meeting. Acknowledging discussions about potential rate cuts and signalling a commitment to delivering 75 basis points of easing in the coming year marked a significant shift from its previous position.

As traders gain confidence in the expectation that the U.S. central bank will prioritize economic growth over price stability, anticipating multiple rate cuts in 2024, bond yields are likely to continue heading lower in the short term. This scenario creates a challenging environment for the U.S. dollar.

The positive sentiment and market enthusiasm fuelled by the Federal Open Market Committee’s (FOMC) dovish posture will further act as a headwind for the greenback, contributing to the strength of riskier and high-beta currencies for the time being. Given these factors, there is a possibility of witnessing new lows for the DXY index before the conclusion of 2023.