© Reuters
Investing.com – The Fed’s dovish turn at its December meeting supported the case for continued weakness into 2024, although the strength of the US economy may limit the dollar’s decline.
After rising to a two-decade high as a result of the Federal Reserve’s interest rate hike in 2022, the greenback has been swinging in a wide range this year on solid US economic growth and the central bank’s pledge to keep borrowing costs high.
The dollar achieved a loss of 2% this year against a basket of its peers, which is its first annual loss since 2020.
One month…the collapse of the dollar
It marked an unexpected turnaround after Chairman Jerome Powell said the historic tightening in monetary policy that pushed interest rates to their highest level in decades was likely over, thanks to cooling inflation. Officials now expect to submit…
Rate cuts are typically seen as a drag on the dollar, as they make dollar-denominated assets less attractive to investors seeking yield. Although strategists had expected the dollar to weaken next year, a faster pace of interest rate cuts may accelerate the currency’s decline.
However, betting on a falling dollar has been a risky undertaking in recent years, and some investors are wary of rushing. A US economy that continues to outperform its peers could be a headwind for passive investors.
“Effective monetary reserve and growth policies aimed at boosting growth in the US represented an American exceptionalism and delivered the strongest dollar rally since the 1980s,” said Kit Jukes, head of FX strategies at Société Générale. Once the Fed eases policy, “some of these gains should be reversed,” he said.
The Fed reduced…150 points?
The dollar’s path may depend on the extent to which the Fed’s downgrade and inflation actually reflect its price. Contracts linked to the Fed rate show investors estimate that more than 150 basis points of cuts are expected next year, roughly double what Fed officials intend. “If inflation stalls and does not continue to decline, this is where the case grows for the Fed to delay the process,” according to Matt Wheeler, head of market research at StoneX. “That would definitely be a positive development for the dollar.”
2023-12-31 10:14:00
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