After a strong performance in the second half of 2023, the US dollar is expected to face a downturn in 2024 as the Federal Reserve prepares to ease interest rates. In the second half of 2023, the dollar’s bullish trend has been fueled by robust U.S. economic growth, which posted a 4.9% quarter-over-quarter annualized increase in the third quarter, even amid declining inflation rates. This growth has made holding dollars more attractive, especially as investors anticipate a slowdown in global demand that could affect Europe and Asia.
However, the outlook for 2024 suggests a shift, prompting the Federal Reserve to cut interest rates by 150 basis points starting in 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 called “US exceptionalism”. As a result, there may be opportunities for investors to diversify and add to non-dollar currencies.
In the run-up to the Fed’s expected first rate cut, experts are predicting a bullish steepening of the US yield curve. This phase of the economic cycle typically favors a weaker dollar and could benefit undervalued commodity currencies. In addition, as interest rates in the US fall, “growth” currencies such as the Swedish krona could rally, mirroring trends in growth sectors such as technology and real estate.
Looking ahead, the baseline forecast suggests that the dollar’s bearish trend could accelerate throughout 2024. By the end of the year, several currencies are expected to strengthen against the dollar, ranging from a 2% gain for the Chinese renminbi to a 13% gain for the Scandinavian currencies. The EUR/USD exchange rate may reach the 1.15 level. However, it’s important to note that this outlook could be affected 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 watching these developments closely as they recalibrate their strategies in response to changing monetary policies and global economic dynamics.