New York City- December 29, 2023
The US dollar is on track for its most challenging year since the onset of the pandemic, facing a steep annual drop of nearly 3%, marking the sharpest decline since 2020. Wall Street’s anticipation of Federal Reserve easing, driven by concerns over a slowing US economy, has led to increased bets on interest rate cuts, impacting the greenback’s performance.
The Bloomberg gauge, measuring the dollar’s strength, has seen a significant decline, particularly in the fourth quarter. The prevailing sentiment suggests that the Fed is likely to adopt a more accommodative policy in the coming year, prompting bets against the dollar, as other central banks may maintain higher interest rates for a longer duration.
Swaps traders are now factoring in potential Fed rate cuts of at least 150 basis points, with the first expected as soon as March. This reflects a notable shift from mid-November when the projection was less than 100 basis points. Speculative traders have become increasingly bearish on the dollar since the Fed’s December meeting.
Amanda Sundstrom, a fixed-income and foreign-exchange strategist at SEB AB in Stockholm, commented on the market sentiment, stating, “Markets are positioned for this ‘Goldilocks’ scenario where the Fed will cut rates enough to stimulate the economy without reigniting inflation pressures. That’s driving the dollar performance.”
Sundstrom anticipates a persistently weaker dollar in 2024 as US economic data weakens. However, she notes that it may not be sufficient to trigger a risk-off bid for safe-haven assets like the greenback.
Despite the downward trend, some analysts suggest the possibility of a temporary rebound for the dollar. The Bloomberg Dollar Spot Index’s 14-day relative strength index recently fell below 30, signaling oversold conditions and potential for a reversal.
Looking ahead, the lead-up to the US presidential election in November may introduce further dynamics to the dollar’s movement. Koji Fukaya, a fellow at “Market Risk Advisory Co. in Tokyo,” suggests that the presence of Donald Trump as a candidate could bring political turmoil and inject volatility into the currency.
In contrast to the dollar’s struggles, the British pound is experiencing its strongest year since 2017, with a gain of over 5% against the dollar in 2023. The Swiss franc is also on pace for its best annual performance since 2010, reaching record trade-weighted highs. The Swiss National Bank’s perceived commitment to tighter policy relative to other central banks has contributed to the franc’s strength.
Geoffrey Yu, a “currency and macro strategist at BNY Mellon in London,” highlighted potential interventions by the Swiss National Bank to push down their currency in the coming year. Regarding the pound, he expressed caution, stating, “I won’t chase it aggressively until we get BOE clarity,” referring to the Bank of England.