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Dollar Portrait


Wall Street sees deeper interest rate cuts than the Fed 

The Federal Reserve's unexpected dovish shift in December has strengthened the case for the ongoing depreciation of the dollar into 2024 — although the resilience of the U.S. economy may act as a limiting factor on the greenback's decline. 

Despite reaching a two-decade high due to the Fed's rate hikes in 2022, the U.S. currency has been largely range-bound this year, driven by robust U.S. growth and the central bank's commitment to maintaining elevated borrowing costs. 

The recent Fed meeting marked a surprising change, with Chairman Jerome Powell stating that the historic tightening of monetary policy, which brought rates to their highest level in decades, was likely over due to easing inflation. The Federal Reserve’s “dot plot” showed the policymakers now anticipate 75 basis points (bps) of cuts in the coming year — Wall Street investment banks are forecasting deeper reductions, with projections ranging from as much as 275 bps from UBS to Goldman Sachs’ more conservative estimate of 50 bps. 

Dollar weakness not a given as U.S. exceptionalism still in play 

Typically, falling interest rates are viewed as a headwind for the dollar, reducing the appeal of U.S. currency assets to yield-seeking investors. While analysts had already anticipated a weaker dollar in the upcoming year, an accelerated pace of rate cuts could hasten the currency's decline. 

However, predicting a weaker dollar has been a risky endeavor in recent times, and some investors are cautious about making premature moves. The continued outperformance of the U.S. economy compared to its global counterparts could pose a challenge for bearish investors. 

Kit Juckes, chief FX strategist at Societe Generale, told Reuters that the Fed’s aggressive monetary policy tightening, along with post-pandemic policies to boost U.S. growth, has "fueled the notion of American exceptionalism and delivered the most powerful dollar rally since the 1980s”. 

With the Fed set to ease policy, "some of those gains should be reversed," he said. 

The U.S. dollar index (DXY) — a measure of the greenback’s strength against a basket of its peers — is on track for a 1% loss this year. 


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Dollar forecasts for 2024: Reuters poll shows USD decline against G10 currencies 

Accurate forecasting of the dollar is crucial for analysts and investors, given its central role in global finance. A weakened dollar would enhance the competitiveness of U.S. exports and increase the profits of multinational corporations by reducing the cost of converting foreign earnings into dollars. According to FactSet data, around a quarter of S&P 500 companies generate over 50% of their revenues outside the U.S. 

A Reuters poll in early December, involving 71 FX strategists, indicated expectations for the dollar to decline against G10 currencies in 2024, with the majority of the decline anticipated in the latter half of the year. 

The accuracy of these forecasts may hinge on the relative performance of the U.S. economy against its global counterparts and the speed at which central banks adjust their monetary policies. 




Global economy in 2024: Uneven growth forecast for upcoming year, IMF sees U.S. GDP up 1.5% 

The economic landscape has been uneven so far, with the eurozone experiencing a deepening downturn in business activity, indicating a likely recession. Despite this, the European Central Bank (ECB) has resisted rate cut expectations, prioritizing the fight against inflation. The euro has appreciated by 2.4% against the dollar this year. 

On the other hand, some observers identify strength in Asian economies, particularly in China and India. Paresh Upadhyaya, director of fixed income and currency strategy at Amundi US, recently told the Reuters news agency the market is overly pessimistic about the growth outlook for these countries. Accelerated growth could benefit commodity currencies like the Australian, New Zealand, and Canadian dollars. 

Reports from state media indicate that China plans to implement policy adjustments to support economic recovery in 2024. 

In October, the International Monetary Fund forecasted a 1.5% growth rate for the U.S. economy in 2024, compared to 1.2% for the eurozone and 4.2% for China. 

The trajectory of the dollar may also depend on the extent to which Fed easing and falling inflation are already priced into its value. Futures linked to the Fed's policy rate reveal that investors are factoring in more than 140 basis points in cuts next year, nearly double the amount projected by Fed policymakers. 

Analysts’ 2024 USD forecasts: SocGen bearish, HSBC and Citibank HK bullish on greenback 

In his USD forecast issued on December 15, Societe Generale’s Kit Juckes said the dollar index would fall to 97 in 2024. He said the projection was fairly reserved compared to the DXY’s recent drop: 

“We expect the dollar index to fall by just under 5% to 97 in 2024, but to put that in context, it has lost 5% since October 3, so we’re not exactly forecasting fireworks”. 

Earlier in December — notably prior to the Fed’s dovish press conference — economists at HSBC said they saw USD remaining strong in 2024: 

“With so much Fed easing already priced in, the scope for a dovish extension lower in the USD seems limited. For the USD to weaken for a sustained period of time, a lot more optimism is required. That is, the global economy shows green shoots, inflation pressures in major economies fall faster, and risk appetite accelerates even further. The bar seems high.  

We remain confident in our medium-term USD bullishness, based on soft global growth and comparatively high US yields. Nevertheless, unless a catalyst triggers a market re-pricing, the USD is expected to consolidate into the end of 2023”. 

In a FX Snapshot dated December 18, analysts at Citi’s Wealth Management division in Hong Kong said they were bullish on the DXY index on a 6-to-12 month horizon: 

“The start of 2024 likely sees a more benign backdrop, with recoveries in global manufacturing and China’s economy acting as USD headwinds, especially as the bar for a more hawkish Fed is now very high. Improving global growth expectations and a peak in US yields should see DXY drifting below 102 over the next 3 months. As the year progresses, however, the impact of higher global rates are likely to start to bite. This should lead to a slowdown across major developed economies, though not necessarily on a synchronized basis. If US recession is later in the year relative to Europe, which may see USD strength once again, with DXY recovering to 107+ on a 6–12-month horizon”. 

At the time of writing on December 22, the DXY dollar index was trading at 101.74, down over 1.70% year-to-date. 

When considering foreign currency (forex) for trading and price predictions, remember that trading CFDs involves a significant degree of risk and could result in capital loss.  

Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice. 

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