And yet, that only really manifested in the final two months of the year. That after markets and the Fed needing added time to really be convinced of the disinflation process. But even so, the aggressive nature of the rate cuts pricing since November has put the dollar down by quite a fair bit after its strong positioning for the better part of 2023.
Here’s a snapshot of the major currencies performance against the dollar for the year:
The Japanese yen is of course the exception as it has been greeted with much disappointment amid any policy pivots but also after a surging run higher in bond yields right up until Q4 2023.
But as you can see, European currencies are the ones taking full advantage of the dollar’s retreat. And that comes despite the fact that markets are also seeing quicker rate cuts by the ECB and BOE heading into next year. The difference is that perhaps the disinflation narrative there isn’t as prevalent as in the US, making the conviction for Fed rate cuts that much stronger.
And that especially after the change in language by Fed chair Powell in the final FOMC meeting for the year and also from the dot plots projection.
So, will the run lower in the dollar, like what we have seen in the last two months, continue into the new year? And will that be the main story in trading for 2024?
If trading this year is anything to go by, it might not be as straightforward as that.
There’s still going to be a lot of moving parts to scrutinise, with the most important one being the inflation outlook. For now, the disinflation process looks to be going uninterrupted. And that is helping to spur on risk trades as well. In other words, it’s a complete reversal to the early stages of this year as traders now opt for a sell the dollar, buy everything else mood.
The next key thing to watch will be how the global economy fares. Currently, the fact that a soft landing is the likely scenario to beckoning is also helping to cushion the pessimistic hammer on risk assets. Indirectly, that’s a headwind for the dollar as such.
But if there are growing concerns that a soft landing may turn into something worse, that could help to turn things around for the dollar. That especially if the US continues to be the cleanest shirt among the dirty pile of laundry.
For now, it is vital to be aware that markets are treating as though this i.e. dollar demise, is going to be the main theme in trading next year. That is evident by the pricing in rates and central banks in the last few weeks, as well as the price action across asset classes. So, if there is going to be reason to run all of that back, the correction/retracement can be quite a forceful one in favour of the greenback.
That will be a key consideration for trading next year when thinking about the supposed imminent demise of the dollar.