The US dollar is set for its worst year since 2020

THE US dollar closed out its worst year since the onset of the pandemic as Wall Street ramped up bets that the Federal Reserve is set to lower interest rates in 2024.

After being whipsawed by false starts calling for the end of the Fed’s rate hiking regime, a Bloomberg gauge of the greenback tumbled 2.7 per cent this year in the steepest annual drop for the US currency since 2020.

Much of the decline materialised in the fourth quarter, on growing wagers that the Fed will loosen policy next year as the US economy slows. That dents the US dollar’s appeal, as other central banks may keep their rates higher for longer.

Swaps traders are now factoring in Fed rate cuts of at least 150 basis points (bps), with the first coming as soon as March. That is up from less than 100 bps in mid-November and double what policymakers penciled in at their most recent meeting. Among speculative traders, US dollar positioning has become all the more bearish since the Fed’s December meeting. 

“Markets are positioned for this ‘Goldilocks’ scenario where the Fed will cut rates enough to stimulate the economy without reigniting inflation pressures,” said Amanda Sundstrom, a fixed income and foreign exchange strategist at SEB in Stockholm. “That’s driving the dollar performance.” 

Sundstrom added that the softer dollar is likely to persist in 2024 as US data weakens, but not enough to spur a risk-off bid for haven assets such as the greenback. 

Still, the US dollar’s recent losses suggest there is room for at least a temporary rebound. The Bloomberg Dollar Spot Index’s 14-day relative strength index recently traded below 30, a signal to some that the currency is now oversold and primed for a reversal.

Looking out further, the dollar may move in the lead-up to the US presidential election in November, according to Koji Fukaya, a fellow at Market Risk Advisory Co in Tokyo. In particular, Donald Trump’s presence as a candidate could cause political turmoil and inject volatility into the currency, he said.

The Bloomberg dollar gauge held steady on Friday (Dec 29) in the last trading day of the year, while Treasuries ended a holiday-shortened session mixed. 

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The US dollar’s decline stands in contrast to the pound, which capped its best year since 2017, and the franc, which recorded its strongest annual performance since 2010. 

Sterling rallied 5.4 per cent against the US dollar in 2023, the biggest gain since the UK currency strengthened 9.5 per cent in 2017. 

In Switzerland, the franc surged to record trade-weighted highs as traders increasingly expect the Swiss National Bank (SNB) to hold policy tighter relative to its counterparts, even after a relatively dovish meeting on Dec 14. 

Still, policymakers’ stance on the currency changed recently, with president Thomas Jordan saying this month that interventions could now go in both directions. Data released on Friday showed that the SNB slightly reduced its sales of foreign exchange – and buying of its own currency – in the third quarter. 

“If I had to pick a central bank most likely to intervene to push down their currency next year, it would be the SNB,” said Geoffrey Yu, a currency and macro strategist at BNY Mellon in London. As for the pound, “I won’t chase it aggressively until we get BOE clarity,” he said. BLOOMBERG