WASHINGTON – The US dollar, which has seen a strong performance in the latter half of 2023, is expected to face a downturn in 2024 as the Federal Reserve gears up to ease interest rates. In the second half of 2023, the dollar's bull trend was propelled by robust US economic growth, boasting a quarter-over-quarter annualized increase of 4.9% in Q3, even amidst declining inflation rates. This growth has made holding dollars more attractive, particularly as investors forecast a reduction in global demand that could impact Europe and Asia.
However, the outlook for 2024 suggests a shift. prompting the Federal Reserve to lower interest rates by 150 basis points starting from the second quarter. This adjustment is seen as an alignment with the Fed's dual mandate and is expected to mark the end of what has been termed 'US exceptionalism.' As a result, opportunities may arise for investors to diversify and enhance non-dollar currencies.
Leading up to the Fed's anticipated first rate cut, experts foresee a bullish steepening of the US yield curve. This phase in the business cycle typically favors a weaker dollar and could benefit undervalued commodity currencies. Furthermore, as rates in the US drop, 'growth' currencies like the Swedish krona may also experience recovery, mirroring trends seen in growth sectors such as technology and real estate.
For the year ahead, baseline forecasts indicate that the bearish trend for the dollar could pick up pace throughout 2024. By year's end, various currencies are projected to strengthen against the dollar, ranging from a 2% rise for China’s renminbi to as much as a 13% increase for Scandinavian currencies. The EUR/USD exchange rate is potentially set to hit the 1.15 level. Yet, it's important to note that this outlook could be influenced by several factors including potential energy supply disruptions from the Middle East or political developments such as Trump's stance on China.
Investors and market participants will be closely monitoring these developments as they recalibrate their strategies in response to changing monetary policies and global economic dynamics.
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