King dollar seen vulnerable in 2024 if Fed pivots
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[December 20, 2023] By
Saqib Iqbal Ahmed
NEW YORK (Reuters) - The Federal Reserve's dovish December pivot has
boosted the case for the weakening dollar to keep falling into 2024,
though strength in the U.S. economy could limit the greenback’s decline.
After soaring to a two-decade high on the back of the Fed’s rate hikes
in 2022, the U.S. currency has been largely range-bound this year on the
back of resilient U.S. growth and the central bank's vow to keep
borrowing costs elevated.
Last week's Fed meeting marked an unexpected shift, after Chairman
Jerome Powell said the historic monetary policy tightening that brought
rates to their highest level in decades was likely over, thanks to
cooling inflation. Policymakers now project 75 basis points of cuts next
year.
Falling rates are generally seen as a headwind for the dollar, making
assets in the U.S. currency less attractive to yield-seeking investors.
Though strategists had expected the dollar to weaken next year, a faster
pace of rate cuts could accelerate the currency's decline.
Still, betting on a weaker dollar has been a perilous undertaking in
recent years, and some investors are wary of jumping the gun. A U.S.
economy that continues to outperform its peers could be one factor
presenting an obstacle for bearish investors.
The Fed’s aggressive monetary policy tightening, along with
post-pandemic policies to boost U.S. growth, "fueled the notion of
American exceptionalism and delivered the most powerful dollar rally
since the 1980s," said Kit Juckes, chief FX strategist at Societe
Generale.
With the Fed set to ease policy, "some of those gains should be
reversed," he said.
The dollar is on track for a 1% loss this year against a basket of its
peers.
FADING STRENGTH?
Getting the dollar right is key for analysts and investors, given the
U.S. currency's central role in global finance.
For the U.S., a weak dollar would make exports more competitive abroad
and boost the profits of multinationals by making it cheaper to convert
their foreign profits into dollars. About a quarter of S&P 500 companies
generate more than 50% of revenues outside the U.S., according to
FactSet data.
An early December Reuters poll of 71 FX strategists showed expectations
for the dollar to fall against G10 currencies in 2024, with the greater
part of its decline coming in the second half of the year.
Whether they're right may come down to how the U.S. economy performs
compared to its global peers next year and the pace at which central
banks adjust monetary policy.
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A man wears U.S. dollar sign rings in a jewellery shop in Manhattan
in New York City November 6, 2014. Picture taken November 6, 2014.
REUTERS/Mike Segar
So far, it's been an uneven picture. In the eurozone, a downturn in
business activity deepened in December, according to closely watched
surveys that show the bloc’s economy is almost certainly in
recession. Still, the European Central Bank has pushed back against
rate cut expectations as it remains focused on fighting inflation.
The euro is up 2.4% against the dollar this year.
The "growth slowdown is more entrenched in other economies," said
Thanos Bardas, senior portfolio manager at Neuberger Berman, who is
bullish on the dollar over the next 12 months. "For the U.S. it will
take a while for growth to slow down."
Others, however, see areas of strength, particularly in Asian
economies. Paresh Upadhyaya, director of fixed income and currency
strategy at Amundi US, says he believes the market is "way too
pessimistic" on the outlook for growth in China and India.
Accelerating growth could boost the countries' appetite for raw
materials, benefiting commodity currencies such as the Australian,
New Zealand and Canadian dollars.
China will step up policy adjustments to support an economic
recovery in 2024, according to state media reports.
Jack McIntyre, portfolio manager at Brandywine Global in
Philadelphia, is counting on U.S. growth slowing while Chinese
growth picks up. He has been selling the dollar to fund the purchase
of Asian currencies.
"The dollar's bull run is very mature," he said.
The International Monetary Fund in October forecast the U.S. economy
would grow by 1.5% in 2024, compared to 1.2% for the eurozone and
4.2% for China.
Of course, the dollar's trajectory could depend on how much Fed
easing and falling inflation is already reflected in its price.
Futures tied to the Fed's policy rate show investors factoring in
more than 140 basis points in cuts next year, nearly twice as much
as Fed policymakers have penciled in.
"If inflation stalls and does not continue to decline that's where
the case grows for the Fed to hold off," said Matt Weller, head of
market research at StoneX. "That would certainly be a bullish
development for the dollar."
(Reporting by Saqib Iqbal Ahmed; Editing by Ira Iosebashvili and
Deepa Babington)
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