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 U.S. dollar edged higher Thursday, bouncing off its over one-year low after the Federal Reserve announced an outsized interest rate cut, while sterling gained ahead of the Bank of England’s latest policy-setting meeting.
At 04:25 ET (08:25 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.1% higher to 100.410, having fallen to a more than 12-month low in the previous session.
Large Fed cut confirmed
The started its latest rate-cutting cycle on Wednesday, trimming interest rates for the first time since March 2020 by a hefty 50 basis points to a range of 4.75% to 5%.
Fed Chair Jerome Powell said that risks between higher inflation and more labor market weakness were now evenly balanced, and that the central bank was likely to cut rates further amid growing confidence that inflation will fall.
But Powell also said that the bank had no intention of returning to an ultra-low rate regime as seen during the pandemic, and that the Fed’s neutral rate will now be much higher than seen in the past.
“Where does the Fed’s decision leave the dollar,” analysts at ING ask, in a note. “In our view, still in a softer position compared to most developed market peers. Powell tried to mitigate the dovishness of the outsized rate cut, but that it would be hard to fight the perception that it was the dovish market pricing that pushed the Fed over the line for the 50bp move. If the Fed is perceived as unwilling to disappoint market expectations, investors may continue to prefer erring on the dovish side.”
Attention turns to the release of the weekly data, for the latest clues over the health of the important labor market.
Sterling in demand ahead of BoE meeting
In Europe, rose 0.3% to 1.3253, after climbing to 1.3298 in the previous session, its strongest level since March 2022.
The meets later in the session, and is expected to hold its key interest rate at 5%, after kicking off its easing with a 25-bp reduction in August.
“The inflation picture simply hasn’t improved enough to warrant more easing just yet,” said ING.
UK came in at 2.2% on an annual basis last month, close to the bank’s medium-term target, but services inflation is running hot at an annual 5.6%.
traded 0.3% higher to 1.1149, not far from the three-week high hit in the previous session.
The cut rates for the second time this year last week, but a degree of uncertainty exists over when the next move will be.
Eurozone inflation is still not as low as the ECB would like, Bundesbank President Joachim Nagel said on Wednesday, so interest rates need to remain sufficiently high to resolve price pressures.
While inflation fell to 2.2% in August and may fall even closer to the ECB’s 2% target this month, it will likely rise again towards the end of the year and could end 2024 around 2.5%.
Yen retreats ahead of BOJ meeting
rose 0.3% to 142.75 as traders also positioned for no changes to local interest rates after a meeting on Friday.
The central bank is widely expected to keep rates unchanged, but could still signal future rate hikes on an elevated outlook for inflation.
Japanese is also due on Friday.
traded 0.2% lower to 7.0698, ahead of a decision by the People’s Bank of China on Friday. The central bank is expected to leave this key rate unchanged.
By Sameer Manekar
(Reuters) – Analysts remained bullish on most Asian currencies despite marginally dialling back some bets, a Reuters poll showed on Thursday, as a defensive U.S. dollar driven by a dovish Federal Reserve enhanced the appeal of risk-sensitive assets.
Long bets were the highest on the Malaysian ringgit and the Thai baht, with those on the latter at their peak since January 2023, driven by strong growth fundamentals and stabilising politics.
Responses to the fortnightly poll of 10 economists and analysts were received before the U.S. Federal Reserve’s half-point rate cut and Bank Indonesia’s surprise quarter-point rate cut on Wednesday.
Anticipation of Fed rate cuts pushed the dollar to the defensive, providing a much-needed breathing space for emerging markets and improving their allure. Most Asian currencies logged a stellar recovery in August against the dollar.
“We do not rule out further bouts of USD weakness in the weeks ahead and expect overall downward pressure on USD/Asia FX to be sustained,” analysts at Barclays said.
The is trending near 100 against a basket of major currencies, down from 104 at the end of July.
The analysts said they expect Asian currencies to continue to appreciating in the fourth quarter, but foresee a reversal in the first half of 2025.
Ryota Abe, an economist at Sumitomo Mitsui (NYSE:) Banking Corp, said the market view of Fed rate cuts by the year-end “looks excessive” which could lead to correction in Asian emerging market currencies.
Bullish bets on the Chinese yuan and Singapore dollar were dialled back to levels seen four weeks ago, while those on the Philippine peso hit a four-year peak.
Analysts were long on the Indonesian rupiah for the fourth consecutive iteration of the poll – the longest since May 2023 – underlining the recent appreciation stemming from robust economic fundamentals and growing inflows into emerging markets.
The rupiah has appreciated more than 6% since July and is expected to continue marching on after Bank Indonesia’s (BI) surprise rate cut decision to support growth, front-running the Fed.
Barclays analysts said BI will “likely broadly match or slightly under-deliver versus the Fed in terms of the magnitude of total cuts” which should not “necessarily see the IDR fall out of markets’ favour from a rates-differentials perspective”.
The Indian rupee continued to remain out of analysts’ favour, although short positions were halved since early August as the currency staged a recovery following a sell-off driven by the unwinding of yen carry trades.
The Asian currency positioning poll is focused on what analysts and fund managers believe are the current market positions in nine Asian emerging market currencies: the Chinese yuan, South Korean won, Singapore dollar, Indonesian rupiah, Taiwan dollar, Indian rupee, Philippine peso, Malaysian ringgit and the Thai baht.
The poll uses estimates of net long or short positions on a scale of minus 3 to plus 3. A score of plus 3 indicates the market is significantly long U.S. dollars.
The figures include positions held through non-deliverable forwards (NDFs).
The survey findings are provided below (positions in U.S. dollar versus each currency):
DATE
19-Sep-24 -0.67 -0.9 -1.12 -1.18 -0.66 0.33 -1.3 -1.1 -1.33
05-Sep-24 -0.85 -1.09 -1.26 -1.05 -0.77 0.21 -1.46 -1.00 -1.22
22-Aug-24 -0.62 -0.93 -1.08 -1.26 -0.70 0.21 -1.57 -1.03 -1.16
08-Aug-24 -0.02 0.05 -0.61 -0.02 0.59 0.60 -0.78 -0.29 -0.57
25-Jul-24 1.07 0.79 -0.33 0.35 0.86 0.12 0.39 0.43 0.02
11-Jul-24 1.05 0.87 0.06 0.73 0.68 0.22 1.03 0.86 0.51
27-Jun-24 1.34 1.28 0.80 1.49 0.88 0.46 1.00 1.37 0.91
13-Jun-24 0.95 0.87 0.62 1.22 0.64 0.37 1.00 1.23 0.92
30-May-24 1.05 0.72 0.33 0.94 0.53 0 0.81 1.19 1.00
16-May-24 1.05 0.96 0.35 0.96 1.02 0.39 1.23 1.29 1.00
Investing.com– Most Asian currencies moved in a flat-to-low range on Thursday as the dollar firmed sharply after an outsized interest rate cut by the Federal Reserve was offset by less dovish signals on future rates.
The Japanese yen was among the worst performers for the day, retreating amid pressure from the dollar and as traders priced in no changes to interest rates by the Bank of Japan later this week.
Broader Asian currencies were muted tracking mixed signals from the Fed.
Dollar rises past 50 bps rate cut, Fed outlook less dovish
The and both rose about 0.4% in Asian trade, extending overnight gains.
Strength in the greenback came even as the Fed – the higher end of market expectations- to a range of 4.75% to 5%.
Fed Chair Jerome Powell said that risks between higher inflation and more labor market weakness were now evenly balanced, and that the central bank was likely to cut rates further amid growing confidence that inflation will fall.
But Powell also said that the bank had no intention of returning to an ultra-low rate regime as seen during the pandemic, and that the Fed’s neutral rate will now be much higher than seen in the past.
While traders were still pricing in at least 125 bps worth of cuts by end-2024, Powell’s comments spurred expectations that rates will be higher than initially expected in the medium and long term.
This notion pressured most Asian currencies.
Japanese yen weakens with BOJ on tap
The Japanese yen’s pair rose 0.6% to 143.12 yen and was among the worst performers in Asia.
The currency was pressured by strength in the dollar, while traders also positioned for no changes to local interest rates after a on Friday.
The central bank is widely expected to keep rates unchanged, but could still signal future rate hikes on an elevated outlook for inflation. Japanese is also due on Friday.
Broader Asian currencies were mostly mixed. The Australian dollar’s pair rose 0.4%, buoyed by a stronger-than-expected reading on the in August.
Strength in the labor market gives the Reserve Bank of Australia more headroom to keep rates high for longer, which it is more inclined to do amid signs of sticky inflation in the country.
The Chinese yuan’s pair reversed early gains to trade sideways, with focus squarely on a l decision by the People’s Bank on Friday. The central bank is expected to leave the LPR unchanged.
The South Korean won’s pair jumped 1% as local trade resumed after three days of holidays. The country’s shrank slightly in August.
The Indian rupee’s pair was flat, but moved further away from the 84 rupee level. The Singapore dollar’s pair was flat.
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