Euro tumbles to a two-year low following Fed's hawkish rate cut

The euro tumbled against the US dollar to near a two-year low of mid-1.03, a level briefly reached late in November and the lowest in two years. The decline was triggered by the Federal Reserve's (Fed) hawkish rate cut on Wednesday night. The EUR/USD pair dropped more than 1%, or 1.4 US cents per euro before a slight rebound in the Asian session on Thursday. 

The Fed cut the interest rate by 25 basis points as expected. However, the bank signalled a much more hawkish stance on its easing cycle next year. The Fed's dot plot, a chart that projects the future path of interest rates, indicated a half-percentage point rate cut in 2025, compared with a full percentage cut projected in September. 

The unexpected shift in the Fed's policy stance sent jitters through global markets, with the US dollar soaring, alongside surging US government bond yields. The US dollar index jumped above 108, a pivotal technical resistance, reaching the highest since November 2022. The US 10-year government bond yield rose 11 basis points to a six-and-a-half-month high of 4.51%. 

In contrast, the European Central Bank (ECB) is expected to further reduce the interest rate by at least a full percentage point next year, which is a much more dovish easing policy than that of the Fed. Analysts anticipated that the ECB may have to accelerate rate cuts in 2025 amid the ongoing challenges facing the eurozone. Political instability, China's slowdown, and a Trump presidency, all contribute to a gloomy economic outlook of the region. 

Last week, the bank lowered the rate by 25 basis points for the fourth time this year. While reiterating a restrictive policy, ECB president Christine indicated interest rates will lower further if incoming data aligns with