Dec 23 (Reuters) - The dollar, which rose close to its highest level in more than two decades in November, is effectively tightening monetary policy and that should influence the Federal Reserve.
The strong dollar should suppress inflation, giving the U.S. central bank more scope to lower the U.S interest rate when traders are not expecting it to fall far.
Expectations for a base in the U.S. interest rate next year may fall from the slightly above 4% currently envisaged towards the 3.5% eyed in the summer.
In contrast, the euro, which has weakened significantly, will support eurozone inflation, lessening the chance that interest rates there drop as far as currently expected.
The deeper EUR/USD drops, the greater the chance of a marked adjustment in current expectations for interest rates which will provide support for the pair when bets on a drop have grown.
The further towards parity EUR/USD drops, the greater the speculative bets on a slide may become, and any drop for this high profile paring is sure to support the greenback on a broader basis.
The dollar, which is trading above the peak of the 20-month Bollinger bands, is already overbought. Corrections followed similar situations in 2009, 2016, 2020 and 2022 and a future pullback could be triggered by a more dovish outlook for the U.S. interest rate.
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(Jeremy Boulton is a Reuters market analyst. The views expressed are his own, editing by Ed Osmond)
((jeremy.boulton@thomsonreuters.com))
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