The dollar is on the decline.

The US dollar has wilted against its peers in the opening month of 2023 as the Federal Reserve fades as the key driver in currency markets and investors focus on the policies of other major central banks.

The Fed’s campaign of big rate rises captivated investors in the first nine months of 2022, igniting a rush into the dollar. But as the US central bank has slowed its increases in borrowing costs, the currency has slid against its peers.

The dollar has fallen 1.5 per cent in January against half a dozen major currencies, leaving it on track to record its fourth-straight monthly decline. It is now trading at levels last seen in May 2022.

“The Fed is no longer in the driver’s seat — and you see that playing out across the foreign exchange space,” said Mazen Issa, senior foreign exchange strategist at TD Securities. Once the Fed had signalled it would end its pace of 0.75 percentage point increases in December, “the Fed effectively decided to cede policy leadership to its global peers”.

Central banks elsewhere have picked up the mantle, most notably the European Central Bank and the Bank of Japan. The ECB is expected to stick with extra-large rate rises while the Fed downshifts. For the BoJ, raising interest rates may still be some way off, but December’s relaxation of its policy of pinning long-term bond yields near zero has fanned speculation that the era of ultra-loose monetary policy in Japan is drawing to a close.

That more hawkish outlook has helped bolster both the yen and the euro, which have returned to their strongest levels since the spring of 2022. Monetary policy decisions next week from the Fed, ECB and Bank of England could provide further clues on whether the Fed will surrender its leadership position this year.

“2022 was the year where everything aligned for the dollar. The Fed was leading the charge with interest rates, and the war in Ukraine and zero-Covid policies in China amounted to favourable terms-of-trade shocks. All these things have unwound at the same time,” said Alan Ruskin, chief international strategist at Deutsche Bank.