Forex
King dollar seen vulnerable in 2024 if Fed pivots
© Reuters. FILE PHOTO: Four thousand U.S. dollars are counted out by a banker counting currency at a bank in Westminster, Colorado November 3, 2009. REUTERS/Rick Wilking/File Photo
By Saqib Iqbal Ahmed
NEW YORK (Reuters) – The Federal Reserve’s dovish December pivot has boosted the case for the weakening dollar to keep falling into 2024, though strength in the U.S. economy could limit the greenback’s decline.
After soaring to a two-decade high on the back of the Fed’s rate hikes in 2022, the U.S. currency has been largely range-bound this year on the back of resilient U.S. growth and the central bank’s vow to keep borrowing costs elevated.
Last week’s Fed meeting marked an unexpected shift, after Chairman Jerome Powell said the historic monetary policy tightening that brought rates to their highest level in decades was likely over, thanks to cooling inflation. Policymakers now project 75 basis points of cuts next year.
Falling rates are generally seen as a headwind for the dollar, making assets in the U.S. currency less attractive to yield-seeking investors. Though strategists had expected the dollar to weaken next year, a faster pace of rate cuts could accelerate the currency’s decline.
Still, betting on a weaker dollar has been a perilous undertaking in recent years, and some investors are wary of jumping the gun. A U.S. economy that continues to outperform its peers could be one factor presenting an obstacle for bearish investors.
The Fed’s aggressive monetary policy tightening, along with post-pandemic policies to boost U.S. growth, “fueled the notion of American exceptionalism and delivered the most powerful dollar rally since the 1980s,” said Kit Juckes, chief FX strategist at Societe Generale (OTC:).
With the Fed set to ease policy, “some of those gains should be reversed,” he said.
The dollar is on track for a 1% loss this year against a basket of its peers.
FADING STRENGTH?
Getting the dollar right is key for analysts and investors, given the U.S. currency’s central role in global finance.
For the U.S., a weak dollar would make exports more competitive abroad and boost the profits of multinationals by making it cheaper to convert their foreign profits into dollars. About a quarter of companies generate more than 50% of revenues outside the U.S., according to FactSet data.
An early December Reuters poll of 71 FX strategists showed expectations for the dollar to fall against G10 currencies in 2024, with the greater part of its decline coming in the second half of the year.
Whether they’re right may come down to how the U.S. economy performs compared to its global peers next year and the pace at which central banks adjust monetary policy.
So far, it’s been an uneven picture. In the eurozone, a downturn in business activity deepened in December, according to closely watched surveys that show the bloc’s economy is almost certainly in recession. Still, the European Central Bank has pushed back against rate cut expectations as it remains focused on fighting inflation. The euro is up 2.4% against the dollar this year.
The “growth slowdown is more entrenched in other economies,” said Thanos Bardas, senior portfolio manager at Neuberger Berman, who is bullish on the dollar over the next 12 months. “For the U.S. it will take a while for growth to slow down.”
Others, however, see areas of strength, particularly in Asian economies. Paresh Upadhyaya, director of fixed income and currency strategy at Amundi US, says he believes the market is “way too pessimistic” on the outlook for growth in China and India. Accelerating growth could boost the countries’ appetite for raw materials, benefiting commodity currencies such as the Australian, New Zealand and Canadian dollars.
China will step up policy adjustments to support an economic recovery in 2024, according to state media reports.
Jack McIntyre, portfolio manager at Brandywine Global in Philadelphia, is counting on U.S. growth slowing while Chinese growth picks up. He has been selling the dollar to fund the purchase of Asian currencies.
“The dollar’s bull run is very mature,” he said.
The International Monetary Fund in October forecast the U.S. economy would grow by 1.5% in 2024, compared to 1.2% for the eurozone and 4.2% for China.
Of course, the dollar’s trajectory could depend on how much Fed easing and falling inflation is already reflected in its price. Futures tied to the Fed’s policy rate show investors factoring in more than 140 basis points in cuts next year, nearly twice as much as Fed policymakers have penciled in.
“If inflation stalls and does not continue to decline that’s where the case grows for the Fed to hold off,” said Matt Weller, head of market research at StoneX. “That would certainly be a bullish development for the dollar.”
Investing.com – The US dollar rose in thin holiday-impacted trade Tuesday, retaining recent strength as traders prepared for fewer Federal Reserve rate cuts in 2025.
At 04:25 ET (09:25 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% higher to 107.905, near the recently hit two-year high.
Dollar remains in demand
The dollar has been in demand since the Federal Reserve outlined a hawkish outlook for its interest rates after its last policy meeting of the year last week, projecting just two 25 bp rate cuts in 2025.
In fact, markets are now pricing in just about 35 basis points of easing for 2025, which has in turn sent US Treasury yields surging, boosting the dollar.
The two-year Treasury yield last stood at 4.34%, while the benchmark 10-year yield steadied near a seven-month high at 4.59%.
“We think this hawkish re-tuning of the Fed’s communication will lay the foundation for sustained dollar strengthening into the new year,” said analysts at ING,in a note.
Trading volumes are likely to thin out as the year-end approaches, with this trading week shortened by the festive period.
Euro near to two-year low
In Europe, fell 0.1% to 1.0396, near a two-year low, with the set to cut interest rates more rapidly than its US rival as the eurozone struggles to record any growth.
The ECB lowered its key rate earlier this month for the fourth time this year, and President Christine Lagarde said earlier this week that the eurozone was getting “very close” to reaching the central bank’s medium-term inflation goal.
“If the incoming data continue to confirm our baseline, the direction of travel is clear and we expect to lower interest rates further,” Lagarde said in a speech in Vilnius.
Inflation in the eurozone was 2.3% last month and the ECB expects it to settle at its 2% target next year.
traded largely flat at 1.2531, with sterling showing signs of weakness after data showed that Britain’s economy failed to grow in the third quarter, and with Bank of England policymakers voting 6-3 to keep interest rates on hold last week, a more dovish split than expected.
Bank of Japan stance in focus
In Asia, fell 0.1% to 157.03, after rising as high as 158 yen in recent sessions, after the signaled that it will take its time to consider more interest rate hikes.
edged 0.1% higher to 7.3021, remaining close to a one-year high as the prospect of more fiscal spending and looser monetary conditions in the coming year weighed on the currency.
Beijing signaled that it will ramp up fiscal spending in 2025 to support slowing economic growth.
Investing.com– Most Asian currencies moved in a tight range on Tuesday, while the dollar extended overnight gains as traders positioned for a slower pace of interest rate cuts in the coming year.
Trading volumes were muted before the Christmas break, while most regional currencies were nursing steep losses against the greenback for the year.
Asian currencies weakened sharply last week after the Federal Reserve effectively halved its outlook for rate cuts in 2025, citing concerns over sticky U.S. inflation.
Dollar near 2-year high on hawkish rate outlook
The and both rose about 0.1% in Asian trade, extending overnight gains and coming back in sight of a two-year high hit last week.
While the greenback did see some weakness after data read lower than expected for November, this was largely offset by traders dialing back expectations for interest rate cuts in 2025.
The Fed signaled only two rate cuts in the coming year, less than prior forecasts of four.
Higher U.S. rates diminish the appeal of risk-driven Asian markets, limiting the amount of capital flowing into the region and pressuring regional markets.
Asia FX pressured by sticky US rate outlook
Most Asian currencies weakened in recent sessions on the prospect of slower rate cuts in the U.S., while uncertainty over local monetary policy and slowing economic growth also weighed.
The Japanese yen’s pair fell 0.1% on Tuesday after rising as high as 158 yen in recent sessions, after the Bank of Japan signaled that it will take its time to consider more interest rate hikes.
The Australian dollar’s pair fell 0.2% after the minutes of the Reserve Bank’s December meeting showed policymakers saw an eventual easing in monetary policy, citing some progress in bringing down inflation. But they still flagged potential upside risks for inflation.
The Chinese yuan’s pair rose 0.1% and remained close to a one-year high, as the prospect of more fiscal spending and looser monetary conditions in the coming year weighed on the currency.
Beijing signaled that it will ramp up fiscal spending in 2025 to support slowing economic growth.
The Singapore dollar’s pair rose 0.1%, while the Indian rupee’s pair rose 0.1% after hitting record highs above 85 rupees.
Investing.com — The dollar has surged past its post-2022 range, buoyed by U.S. economic exceptionalism, a widening interest rate gap, and elevated tariffs, setting the stage for further gains next year.
“Our base case is that the dollar will make some further headway next year as the US continues to outperform, the interest rate gap between the US and other G10 economies widens a little further, and the Trump administration brings in higher US tariffs,” Capital Economics said in a recent note.
The bullish outlook on the greenback comes in the wake of the dollar breaking above its post-2022 trading range, reflecting renewed confidence among investors driven by robust U.S. economic data and policy expectations.
A key risk to the upside call on the dollar is a potential economic rebound in the rest of the world, similar to what occurred in 2016, Capital Economics noted.
Following the 2016 U.S. election, economic activity in the rest of the world rebounded, while Trump’s tax cuts didn’t materialize until the end of 2017, and the Fed took a more dovish path than discounted, resulting in a 10% drop in the DXY on the year, which was its “worst calendar year performance in the past two decades,” it added.
While expectations for a recovery in Europe and Asia seem far off, a positive surprise for global growth “should be ruled out”, Capital Economics said.
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