Daily Management Review

The King Dollar Could Be Fragile In 2024 If The Fed Changes Course


The King Dollar Could Be Fragile In 2024 If The Fed Changes Course
The case for the dollar's continued decline into 2024 has grown following the US Federal Reserve's dovish December pivot, while the strength of the US economy may be able to contain the greenback's fall.
Due to strong U.S. economy and the central bank's commitment to maintaining high borrowing costs, the U.S. currency has been mostly range-bound this year after surging to a two-decade high in 2022 as a result of the Fed's rate rises.
Following Chairman Jerome Powell's statement that decreasing inflation was likely to end the unprecedented monetary policy tightening that drove interest rates to their highest point in decades, last week's Fed meeting represented an unexpected turnabout. Next year, 75 basis points of cutbacks are now anticipated by policymakers.
Falling interest rates are typically perceived as a negative force on the dollar, devaluing US assets in the eyes of yield-seeking investors. Even though analysts had predicted that the dollar would fall in 2019, rate cuts could happen more quickly than anticipated.
Nevertheless, placing a wager on a declining value of the dollar has proven to be risky recently, and some investors are hesitant to act too soon. One thing that could be a hindrance for investors who are pessimistic is the U.S. economy's continued superiority over its peers.
In addition to post-pandemic measures to support U.S. growth, the Fed's aggressive monetary policy tightening "fueled the notion of American exceptionalism and delivered the most powerful dollar rally since the 1980s," according to Kit Juckes, chief FX strategist at Societe Generale.
"Some of those gains should be reversed," he said, given that the Fed is expected to loosen policy.
This year, the dollar is expected to lose 1% of its value relative to a basket of its peers.
Given the U.S. currency's pivotal role in global finance, analysts and investors must get the dollar right.
A weaker currency would benefit the United States by increasing export competitiveness overseas and increasing multinational profits by lowering the cost of converting foreign profits into dollars. Based on FactSet data, around 25% of S&P 500 companies earn over 50% of their income from sources outside the United States.
According to a Reuters survey conducted in early December among 71 FX strategists, the dollar is expected to weaken compared to the G10 in 2024, with the second half of the year seeing the most of this decrease.
Whether they are correct or not may depend on how the U.S. economy does in comparison to other economies around the world in 2019 as well as how quickly central banks modify their monetary policies.
It's been a patchy picture thus far. According to highly watched surveys, the eurozone's economic activity declined further in December, suggesting that the bloc's economy is virtually surely in recession. Nevertheless, the European Central Bank has tempered expectations of a rate cut in order to maintain its emphasis on combating inflation. The euro is 2.4% higher than the US dollar so far this year.
The "growth slowdown is more entrenched in other economies," according to Neuberger Berman senior portfolio manager Thanos Bardas, who anticipates strong dollar performance in the upcoming year. "For the U.S. it will take a while for growth to slow down."
On the other hand, some perceive opportunities, especially in the economies of Asia. The market, according to Paresh Upadhyaya, director of fixed income and currency strategy at Amundi US, is "way too pessimistic" about the prospects for growth in China and India. The need for raw materials in the nation may increase with faster growth, which would be advantageous for commodity currencies like the Australian, New Zealand, and Canadian dollars.
According to reports in state media, China will intensify policy changes in 2024 to aid in an economic rebound.
Portfolio manager Jack McIntyre of Brandywine Global in Philadelphia anticipates a slowdown in U.S. growth and an acceleration of Chinese growth. He has been buying Asian currencies with the money he gets from the sale of dollars.
"The dollar's bull run is very mature," he said.
In October, the IMF predicted that the US economy would expand by 1.5% in 2024, while the eurozone's growth rate would be 1.2% and China's 4.2%.
Naturally, the trajectory of the dollar may be influenced by the extent to which its price has already been impacted by Fed easing and declining inflation. Investors are pricing in more than 140 basis points of rate reduction next year, about twice as much as Fed policymakers have projected, according to futures linked to the Fed's policy rate.
"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."