While the strength of the U.S. economy may limit the dollar's losses, the Federal Reserve's dovish turn in December increases the likelihood that the dollar will continue to weaken in 2024.
After a 2022 Fed rate hike pushed the dollar to a 20-year high, the dollar has remained largely range-bound this year on strong U.S. economic growth and the Fed's pledge to keep borrowing costs rising.
Last week's Fed meeting marked an unexpected U-turn, with Chairman Jerome Powell saying the historic tightening of monetary policy that raised interest rates to the highest level in decades could end as inflation recedes. The market currently generally expects a 75 basis point interest rate cut next year.
Rate cuts are generally considered a headwind for the dollar, making U.S. dollar assets less attractive to yield-seeking investors. While strategists expect the dollar to weaken next year, a faster pace of rate cuts could accelerate the greenback's decline.
However, betting on a weaker dollar has been a risky business in recent years, and some investors are wary of placing a bet too early. The outperforming U.S. economy could be a factor holding back bearish investors.
Kit Juckes, chief foreign exchange strategist at Societe Generale, said that the Federal Reserve's aggressive monetary tightening and post-epidemic policies have promoted the growth of the U.S. economy, "fueled the idea of American exceptionalism and brought about the strongest economic growth since the 1980s." Big dollar rally." "Some of these gains should be reversed" as the Fed prepares to ease policy, he said.
The dollar is expected to fall 1% this year against a basket of peer currencies.
The dollar's movements are important to analysts and investors because of its central role in global finance.
For the United States, a weaker dollar would make U.S. exports more competitive abroad and boost profits for multinational corporations by making foreign profits cheaper to convert into dollars. About a quarter of S&P 500 companies generate more than 50% of revenue, according to FactSet data.
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A Reuters poll of 71 foreign exchange strategists in early December showed that the dollar is expected to weaken against G10 currencies in 2024, with most of its decline occurring in the second half of the year.
Their judgment may depend on how the U.S. economy performs next year compared with other countries and how quickly central banks adjust monetary policy. So far, things have looked uneven. Euro zone economic activity fell in December, according to a closely watched survey, suggesting the region's economy is almost certainly in recession. Still, the ECB has resisted expectations of a rate cut as it focuses on fighting inflation. The euro is up 2.4% against the dollar this year.
Thanos Bardas, senior portfolio manager at Neuberger Berman, said, "The growth slowdown in other economies is more entrenched." He is optimistic about the dollar over the next 12 months. "For the United States, it will be a while before economic growth slows down." .”
Others, however, see some signs of strength, particularly in Asian economies. Paresh Upadhyaya, director of fixed income and currency strategy at Amundi US, said he believed the market was "too pessimistic" about the Asian giant and India's future growth prospects. Accelerating growth could benefit commodity currencies such as Australia, New Zealand and Canada by boosting demand for raw materials in these countries.
According to official media reports, major Asian countries will strengthen policy adjustments to support economic recovery in 2024.
Jack McIntyre, portfolio manager at Philadelphia Brandywine Global, expects U.S. growth to slow and China growth to accelerate. He has been selling dollars and buying Asian currencies. "The dollar bull market is very mature," he said.
The International Monetary Fund forecast in October that the U.S. economy would grow by 1.5% in 2024, while the euro zone would grow by 1.2% and China by 4.2%.
Of course, the dollar's direction may depend on how much the Fed's easing policy and lower inflation are already priced into its price. Futures tied to the Fed's policy rate show investors expect more than 140 basis points of cuts next year, nearly twice what Fed policymakers estimate.
Matt Weller, head of market research at StoneX, said: “If inflation stagnates and does not decline, then the Fed’s reasons for delaying interest rate cuts will increase.” He said, “For the U.S. dollar, the current development trend is definitely positive and may lead to Dollar prices are rising."
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Indonesia
2023-12-21
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