Forex
King dollar seen vulnerable in 2024 if Fed pivots
© Reuters. FILE PHOTO: A man wears U.S. dollar sign rings in a jewellery shop in Manhattan in New York City November 6, 2014. Picture taken November 6, 2014. REUTERS/Mike Segar
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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.
The dollar was on track for a 2% loss this year against a basket of its peers, its first yearly decline since 2020.
The December 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.
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 more than 3% 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 150 basis points in cuts next year, about 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– Most Asian currencies moved little on Friday as the dollar steadied from overnight declines, with focus turning squarely towards key U.S. inflation data due next week, which is likely to provide more cues on interest rates.
The Chinese yuan declined, as did currencies with trade exposure to China after multiple reports said that the U.S. was preparing more trade tariffs on Beijing.
Regional currencies took little support from an overnight decline in the dollar, as more signs of a cooling labor market reinforced bets that the Federal Reserve will cut rates in September.
But the dollar steadied in Asian trade, pressuring regional currencies as uncertainty ahead of key U.S. inflation data next week kept traders largely biased towards the greenback.
Chinese yuan weakens, USDCNY up on tariff reports
The Chinese yuan’s pair rose 0.1% as multiple reports said U.S. President Joe Biden was considering imposing fresh sanctions on certain Chinese industries, such as electric vehicles and batteries.
While the economic impact of the tariffs was unclear, such measures could attract retaliation from China, further souring ties between the world’s two biggest economies.
Other currencies with trade exposure to China fell tracking this notion. The Australian dollar’s pair fell 0.2%, while the Singapore dollar’s and the South Korean won’s pairs lost 0.1% and 0.3%, respectively.
Japanese yen remains fragile, USDJPY nears 156
Weakness in the Japanese yen persisted this week, as the pair recouped a bulk of its losses made after the government seemingly intervened in currency markets last week.
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The USDJPY pair rose 0.2% to 155.73 yen, trading well above lows of 152 it had hit earlier in May. Traders now saw 160 yen as the new line in the sand for Japanese government intervention.
Household spending data for March, released earlier on Friday, showed some resilience- a trend that could potentially underpin Japanese inflation expectations.
Dollar steadies, set for weekly gains ahead of inflation data
The and rose slightly in Asian trade, recovering a measure of overnight losses. But the greenback was still trading up about 0.2% for the week.
The greenback fell on Thursday after data showed a bigger-than-expected increase in weekly , furthering expectations of a cooling U.S. labor market.
This reinforced some expectations that the Fed will begin cutting interest rates by September.
But sticky inflation remained a key point of contention for the Fed, with a slew of officials warning as much this week.
Their comments put upcoming data, due next week, squarely in focus for more cues on interest rates.
Investing.com – More Japanese yen weakness looks likely, according to Bank of America Securities, citing its latest foreign exchange and rates sentiment survey.
At 10:25 ET (14:25 GMT), traded 0.2% higher at ¥155.83, with the pair having gained just under 2% this week as yen weakness returned.
Japanese authorities are seen having spent almost $60 billion the previous week pulling the yen away from a 34-year-low of ¥160.24 versus the dollar.
The bank’s survey has shown a consistently bullish yen bias since mid-2022, analysts at BOA Securities said, until now.
With USDJPY breaching new highs in April, investors have flipped to the largest JPY short since 2022, and there is a deep scepticism around the effectiveness of Japan’s FX intervention.
The bank said the majority of fund managers polled expect USDJPY to retest ¥160, with no one expecting a reversal to ¥150.
“While we generally share these views, the volte-face on JPY perhaps warrants near-term caution for shorts,” the bank added.
Investing.com – The U.S. dollar steadied Friday after losing ground the previous session on weak jobs data, while the pound gained in the wake of stronger-than-expected growth numbers.
At 04:10 ET (08:10 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded just higher at 105.115.
Dollar on track for small gains this week
The dollar steadied Friday, and is course for minor gains this week after losses on Thursday following the release of data showed a bigger-than-expected increase in weekly j.
This evidence of a cooling U.S. labor market reinforced some expectations that the will begin cutting interest rates by September.
However, sticky inflation remains a key point of contention for the Fed, with a slew of officials warning as much this week, comments which boosted the dollar this week.
There is “considerable” uncertainty about where U.S. inflation will head in coming months, San Francisco Federal Reserve President Mary Daly said on Thursday.
“In a scenario where inflation stays … level, just doesn’t make much further progress, then it’s not appropriate to start adjusting the rate unless we see the labor market faltering,” she added.
These comments put upcoming data, due next week, squarely in focus for more cues on interest rates.
Sterling benefits from strong growth data
In Europe, gained 0.1% to 1.2534, recovering from its lowest level since April 24 on Thursday, after data released earlier Friday showed that Britain’s economy grew by the most in nearly three years in the first quarter of 2024.
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U.K. expanded by 0.6% in the three months to March, the strongest growth since the fourth quarter of 2021, as the country’s economy exited the shallow recession it entered in the second half of last year.
On a monthly basis, the grew by 0.4% in March, faster than the 0.1% growth forecast.
The held interest rates at a 16-year high on Thursday, but two of the nine-person Monetary Policy Committee voted for a cut, suggesting that the central bank is moving towards such a reduction.
traded largely unchanged at 1.0783, with a light data calendar providing little impetus.
The has all but promised a rate cut on June 6, but uncertainty exists over how many further cuts the central bank will agree to this year.
Pierre Wunsch, Belgium’s central bank governor, made the case for further moves earlier this week, arguing that staying tight for too long was now a bigger risk than easing too early.
Markets currently price in 70 basis points of rate hikes for this year.
USD/JPY drifts higher
In Asia, rose 0.2% to 155.70, trading well above lows of 152 it had hit earlier in May.
Traders now see the 160 level as the new line in the sand for Japanese government intervention.
rose 0.1% to 7.2249, with the yuan weakening following reports saying U.S. President Joe Biden was considering imposing fresh sanctions on certain Chinese industries, such as electric vehicles and batteries.
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While the economic impact of the tariffs was unclear, such measures could attract retaliation from China, further souring ties between the world’s two biggest economies.
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