Forex

Dollar sees first yearly loss since 2020

Published

12 months ago

January 1, 2024

Dollar sees first yearly loss since 2020

By Karen Brettell and Samuel Indyk

NEW YORK/LONDON (Reuters) -The dollar edger higher on Friday but is set to end 2023 with its first yearly loss since 2020 against the euro and a basket of currencies, on expectations the U.S. Federal Reserve will begin cutting rates next year as inflation moderates.

Questions for 2024 will be when the Fed begins cuts, and whether the first rate reduction is made to avoid over-tightening as inflation drops, or due to slowing U.S. economic growth.

With markets already pricing in aggressive cuts, debate is also focused on how much further the dollar is likely to fall.

“We’ve already weakened quite a bit in anticipation of a Fed cut cycle to come,” said Brad Bechtel, global head of FX at Jefferies in New York.

The dollar’s decline accelerated after the Fed adopted an unexpectedly dovish tone and forecast 75 basis points in rate reductions for 2024 at its December policy meeting.

Markets are pricing in even more aggressive cuts, with the first reduction seen likely in March and 158 basis points in cuts expected by year-end.

The Fed’s tone contrasted with other major central banks, including the European Central Bank (ECB) and Bank of England (BoE), which maintained they will hold rates higher for longer.

But “I do think they will capitulate. European growth is just struggling too much and inflation’s coming down relatively fast … same in the U.K. in many ways,” said Bechtel. “If all three central banks are cutting, it’s going to be very hard for the dollar to weaken significantly.”

Against a basket of currencies, the greenback on Friday gained 0.13% to 101.32, rising from a five-month trough of 100.61 reached on Thursday. It is on track to lose 2.10% this year and is down 4.62% this quarter, the worst performance in a year.

The euro dipped 0.19% to $1.1040, hovering just below a five-month peak of $1.11395 reached on Thursday. It is heading for a 3.04% gain for the year, its first positive year since 2020.

“Markets are looking for a cut earlier in the U.S. and are less certain that the European Central Bank will cut as quickly, so that’s why the dollar is very soft,” said Niels Christensen, chief analyst at Nordea.

“We also have positive risk appetite which is another negative for the dollar. Going into 2024, the soft dollar will be a theme towards the March central bank meetings,” Christensen added.

Policymakers at the ECB and the BoE did not signal any imminent rate cuts at their policy meetings this month, but traders are pricing in 162 bps of cuts by the ECB next year, with the probability of two cuts by April. The BoE is also expected to cut rates by 148 bps in 2024.

“While it feels like the market might have moved too far too fast, the facts are that growth is non-existent in Europe, slowing in the U.S., and inflation is falling globally,” said CJ Cowan, portfolio manager at Quilter Investors.

“The ECB is famously slow to change policy course so almost two cuts priced by April looks aggressive, even if it might be the right thing to do.”

Sterling rose 0.08% to $1.2745 and was on track for a 5.39% yearly gain, its best performance since 2017.

YEN IS AN OUTLIER

The dollar is expected to post an annual 7.56% gain against the yen as the Japanese currency stays under pressure from the Bank of Japan’s (BOJ) ultra-loose monetary policy stance.

Market expectations are for the BOJ to exit negative interest rates in 2024, though the central bank continues to stand by its dovish line and has provided little clues on if, and how, such a scenario could play out.

“The outlook for Japan is encouraging going into 2024, with expectations of robust economic growth and improving inflation that shows signs of being sustainable,” said Aadish Kumar, international economist at T. Rowe Price.

That said, even if the BOJ hikes rates into positive territory, they will still remain much lower than in the United States.

“For all of 2024, if they got to positive 50 basis points I would be kind of surprised, but maybe that happens, and if the Fed gives us three rate cuts, you’re still looking at an interest rate differential of roughly 4.5% or so, which makes the yen very expensive to own,” said Jefferies’ Bechtel.

The yen is a popular funding currency, and investors use proceeds from shorting the yen to purchase other assets.

The Swiss franc is one of the best performing currencies this year, with the greenback losing 8.99% against the currency, the worst drop since 2010.

In cryptocurrencies, fell 1.23% to $42,059. It is on track for a 154% gain this year.

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Currency bid prices at 3:00PM (2000 GMT)

Description RIC Last U.S. Close Pct Change YTD Pct High Bid Low Bid

Previous Change

Session

Dollar index 101.3200 101.2000 +0.13% -2.097% +101.4200 +101.0600

Euro/Dollar $1.1040 $1.1062 -0.19% +3.04% +$1.1084 +$1.1039

Dollar/Yen 141.0200 141.4050 -0.27% +7.56% +141.9100 +140.8000

Euro/Yen 155.69 156.43 -0.47% +10.97% +156.9200 +155.6600

Dollar/Swiss 0.8413 0.8448 -0.38% -8.99% +0.8446 +0.8357

Sterling/Dollar $1.2745 $1.2735 +0.08% +5.39% +$1.2772 +$1.2702

Dollar/Canadian 1.3238 1.3229 +0.08% -2.28% +1.3265 +1.3179

Aussie/Dollar $0.6814 $0.6829 -0.22% -0.04% +$0.6846 +$0.6782

Euro/Swiss 0.9289 0.9342 -0.57% -6.12% +0.9347 +0.9255

Euro/Sterling 0.8660 0.8686 -0.30% -2.08% +0.8701 +0.8661

NZ $0.6320 $0.6333 -0.19% -0.46% +$0.6359 +$0.6306

Dollar/Dollar

Dollar/Norway 10.1520 10.2060 -0.80% +3.16% +10.1990 +10.1100

Euro/Norway 11.2128 11.2800 -0.60% +6.85% +11.2899 +11.1831

Dollar/Sweden 10.0873 9.9876 +0.79% -3.08% +10.0887 +9.9688

Euro/Sweden 11.1353 11.0484 +0.79% -0.13% +11.1390 +11.0395

Forex

Dollar retains strength; euro near two-year low

Published

15 hours ago

December 24, 2024

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.

Forex

Asia FX muted, dollar recovers as markets look to slower rate cuts

Published

15 hours ago

December 24, 2024

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.

Forex

Dollar breaks free, poised for more gains amid US economic outperformance

Published

15 hours ago

December 24, 2024

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.