The Case for a Weakening Dollar in 2024
The Federal Reserve’s Dovish Pivot
The Federal Reserve’s dovish December pivot has bolstered the argument for the weakening dollar to continue its decline into 2024. However, the strength of the U.S. economy could hinder the greenback’s downward trajectory.
The Dollar’s Performance
The U.S. currency, which had reached a two-decade high due to the Fed’s rate hikes in 2022, has remained relatively stable this year, buoyed by robust U.S. growth and the central bank’s commitment to maintaining elevated borrowing costs.
Unexpected Shift
The December Fed meeting brought an unexpected shift in policy, with Chairman Jerome Powell signaling that the era of historic monetary policy tightening was likely over, thanks to moderating inflation. The central bank now anticipates 75 basis points of rate cuts in the coming year.
Impact of Falling Rates
Falling rates are generally seen as a challenge for the dollar, as they reduce the appeal of U.S. currency-denominated assets for yield-seeking investors. While analysts had predicted a weakening dollar in the upcoming year, a faster pace of rate cuts could expedite the currency’s decline.
Uneven Picture
Despite expectations for a weaker dollar, some investors are cautious, given the continued outperformance of the U.S. economy compared to its global counterparts. This “American exceptionalism” has been a key factor in supporting the dollar’s strength in recent years.
Global Economic Scenario
The performance of the dollar in 2024 will depend on various factors, including the relative performance of the U.S. economy compared to other major economies, as well as the adjustment pace of central banks’ monetary policies. While the eurozone faces a deepening downturn, the European Central Bank has resisted calls for rate cuts, while the Chinese and Indian economies are expected to show accelerating growth.
Forecasts and Expectations
A Reuters poll of FX strategists indicated expectations for the dollar to weaken against G10 currencies in 2024, with the most significant decline anticipated in the latter half of the year. However, the trajectory of the dollar could also hinge on whether the market has already priced in the full impact of Fed easing and falling inflation.
Market Sentiment
Market sentiment on the dollar’s future is divided, with some investors bullish on the U.S. currency due to its continued outperformance, while others are optimistic about the growth prospects of Asian economies, which could benefit commodity currencies.
Uncertainties Ahead
As the dollar’s future trajectory remains uncertain, a key factor to watch will be how the Fed responds to evolving economic conditions, particularly with respect to inflation. Any unexpected developments could potentially alter the dollar’s course in the year ahead.
