BENGALURU (Reuters) – A Reuters poll of foreign exchange strategists showed that the dollar will loosen its grip on other G10 currencies in 2024, with a bleak outlook for the currency as the Federal Reserve (US central bank) is expected to start cutting interest rates next year.
Dominating currency markets since mid-2021, the dollar has remained relatively strong through much of this year but lost momentum after a few Fed officials made dovish comments last week.
The dollar index erased all of its annual gains, falling 3.0% in November, its largest monthly decline in a year.
A large part of the US currency’s strength is due to the superior performance of the US economy compared to its peers. The world’s largest economy expanded at an annual rate of 5.2% in the latest quarter, the fastest pace since the fourth quarter of 2021.
While analysts expected the currency’s weak trend to continue next year, the median forecast in a December 1-5 Reuters poll of 71 analysts showed the majority of declines coming in the latter part of 2024.
“We are looking for the dollar to fall further next year, but we think the weakness will be more in the second half of next year,” said Lee Hardman, chief currency strategist at MUFG.
“In the first half of the year, we remain relatively cautious about forecasting a larger dollar sell-off because we believe the global growth story outside the US remains very weak and challenging.”
While forecasts showed that the dollar will remain resilient in the first six months of 2024, there was no clear consensus on what will drive the currency’s performance.
Of the analysts who answered an additional question, 20 of the 47 analysts said interest rate spreads, 17 said economic data, and seven analysts said safe haven demand. The remaining three gave different reasons.
“We are at this turning point in the global economy and central bank policy which may create further uncertainty about what will be the main driver of FX markets over the next six months,” MUFG’s Hardman added.
But after that time period, economic growth and currency valuations were more likely to determine currency movements.
“From Q2 onwards… we believe that cyclical conditions globally will start to improve and this should see markets move away from being primarily driven by price dynamics and move towards cyclical dynamics and valuations where the likes of EUR/USD and USD/CAD are in place,” said Simon Harvey. Head of FX analysis at Monex Europe: “It will suddenly look cheap on this basis.”
The euro, which has risen 1.0% this year, was expected to end December at $1.08, the same level seen in trading on Tuesday.
They are then expected to trade at $1.09, $1.10 and $1.12 in three, six and 12 months, rising 0.4%, 1.5% and 3.6% respectively.
The Japanese yen, the worst-performing major currency this year, has lost about a third of its value in the past three years and was expected to rise 7.4% to trade at $137 a year.
The pound, which has already risen more than 4.0% this year, is expected to rise 1.7% to $1.28 within a year.
(For other stories from the Reuters December foreign exchange poll:)
(Reporting by Hari Kishan; Polling by Prerana Bhatt, Prannoy Krishna and Anant Chandak; Editing by Nick Zieminski)
Copyright 2023 Thomson Reuters.
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