What prospects does the US dollar have this year?

The US dollar will depreciate this year as the Federal Reserve begins to cut interest rates, the performance gap between the US economy and other world economies will narrow, and a possible US recession would have an impact negative on the US currency. On the other hand, a soft landing in the US economy and lower inflation would bring positive sentiment to the markets, which may affect demand for the dollar as a safe-haven asset, according to analysts. Moreover, the prospect of interest rate cuts by the Fed can be seen in the evolution of the American currency, which, after an increase in the July-September period, began to lose ground, as the rhetoric of the central bank of the United States became more relaxed. In this context, after two years of strong appreciation, the US Dollar Index (DXY), which measures the strength of the United States currency against a basket of six other currencies, ended 2023 slightly below the previous year's level.

• Lee Hardman, MUFG: "We are at an inflection point, which creates a lot of uncertainty about the key factors that will influence the currency markets over the next six months"

The dollar's dominance over other Group of Ten (G10) currencies will weaken in 2024, with the U.S. currency facing a weak outlook this year as the U.S. Federal Reserve is expected to begin cutting interest rates, according to a Reuters poll on attended by 71 currency market analysts, carried out in the first part of December last year.

"We think the dollar will weaken further next year (not this year), but we expect the decline to be most pronounced in the second half of the year," said Lee Hardman, senior currency strategist at Mitsubishi UFJ Financial Group ( MUFG)", according to Reuters.

"For the first part of the year we are still cautious about predicting massive dollar selling, as in our view global growth outside the US remains very, very weak and challenging."

Although predictions by analysts polled by Reuters show the dollar showing strength in the first six months of 2024, the survey showed there is no clear consensus on what factors will support the US currency's performance. Of the 47 respondents to this additional survey question, 20 cited interest rate differentials as the reason, 17 cited economic data and seven pointed to the demand for safe-haven assets. The other three gave other reasons, according to the media trust.

"We are at an inflection point in the global economy and central bank policy, which creates more uncertainty about the key factors that will influence currency markets over the next six months," Hardman added. But thereafter, economic growth and relative currency valuations will likely dictate currency movements, said Simon Harvey, head of currency analysis at Monex Europe, according to Reuters.

• Wells Fargo: "A recession in the US economy would cause interest rate and growth trends to turn against the US currency"

Analysts at Wells Fargo believe that the conditions are in place for a pronounced depreciation of the dollar in 2024 under a wide range of economic scenarios, according to FXStreet.

"While US economic outperformance may support the greenback early next year (not this year), we expect broad depreciation of the US dollar as 2024 progresses. Progress on the inflation front means a rate cut by the Fed is expected sooner rather than later, which should limit the dollar's gains," analysts said at the end of November 2023, according to FXStreet.

In their view, a hard landing or a recession in the US economy this year would cause interest rate and growth trends to turn against the US currency. "A soft landing in the United States, together with improving inflation and lower US Treasury yields, may have a positive impact on sentiment in financial markets, which would affect support for dollar as a safe haven asset," Wells Fargo analysts also pointed out.

Basically, as the global monetary policy cycle moves towards the relaxation phase, the depreciation of the dollar seems more and more likely in a wide range of scenarios, the bank's team also pointed out, according to FXStreet.

• Bank of America: "The dollar's weakness will appear amid expectations that the performance gap between the US economy and other economies will narrow"

Bank of America (BofA) has a bearish scenario for the dollar this year, with analysts at the institution stressing that the Federal Reserve's interest rate cuts matter more to the market than cuts by other central banks, according to an article published in Pound Sterling Live last December.

According to analysts, the dollar's weakness will come amid expectations that the performance gap between the US economy and other strong world economies will narrow. They estimate the Federal Reserve will make four 25-basis-point rate cuts this year, the first in March. According to the Financial Times, investors expect the Fed to cut interest rates five times in 2025, while the European Central Bank expects six rate cuts.

"Fed tapering matters more to the market, and the negative impact on the US dollar is likely to be exaggerated against the currencies of other central banks that are cutting interest rates," said Thanos Vamvakidis, head of C10 currency strategies at Bank of America.

In his opinion, rate cuts by the Fed should support risk appetite, and the "risk-on" mode of the financial markets is consistent with a weaker dollar. According to the strategist, one of the risks to BofA's forecast is that the US economy performs better than current expectations and the Fed starts cutting rates later. Another risk is inflation. "There is also the risk of a hard landing, meaning higher interest rates for a longer period of time, which may "break something' in the financial system," Vamvakidis said, adding, however, that it was unclear what impact that might have. such an event on the market.

The election in the United States represents another unknown for 2024, which can create volatility for the American currency, BofA analysts also believe.

• Isabella Rosenberg: "Most cross-border fund flows were directed to the US"

Not all analysts necessarily see a depreciation for the dollar next year. Isabella Rosenberg, macro strategist at Goldman Sachs Research, believes that the US dollar can maintain its strength due to the outperformance of the US economy.

"For 2023, the US economy is on track to have a growth rate well above consensus estimates from the beginning of the year. In this context, and taking into account the economic challenges in Europe and China, it is not surprising that the majority of cross-border fund flows have been directed to the US," Rosenberg wrote in a material published on the Goldman Sachs website at the end of the month November last year.

For 2024, Goldman expects US economic growth of 2.1%, double the consensus estimate, which may keep foreign investors interested in US assets. "While it may be tempting to forecast dollar depreciation, the outperformance of the United States in 2024 means strong demand for the dollar should continue," Rosenberg wrote.

At last December's meeting, the Fed left the key interest rate unchanged in December at a range of 5.25% to 5%, a 22-year high. According to the CME FedWatch Tool, traders expect the U.S. central bank to keep rates unchanged this month, but see about a 60 percent chance it will cut interest rates by 25 basis points at its March meeting.