The US dollar is on track for its most challenging year since the onset of the pandemic in 2020, as Wall Street anticipates a reduction in interest rates by the Federal Reserve to combat slowing economic growth. The Bloomberg gauge of the greenback has experienced a nearly 3% decline since January, marking the steepest annual drop since 2020. This downward trend accelerated in the fourth quarter, fueled by increasing speculation that the Fed will significantly ease monetary policy in the coming year, contrasting with other central banks potentially maintaining higher interest rates for a longer period.
Swaps traders are now incorporating expectations of Fed rate cuts totaling at least 150 basis points, with the first cut potentially occurring as early as March. This represents a notable increase from the less than 100 basis points factored in during mid-November and is double the projection made by policymakers at their most recent meeting. Speculative traders have grown increasingly bearish on the dollar, especially after the Fed’s December meeting.
Amanda Sunstrom, a fixed income and FX strategist at SEB AB in Stockholm, noted, “Markets are positioned for this ‘Goldilocks’ scenario where the Fed will cut rates enough to stimulate the economy without reigniting inflation pressures, driving the dollar’s performance.”
Sunstrom believes that the softer dollar is likely to persist in 2024 as US economic data weakens, although it may not be sufficient to trigger a risk-off bid for safe-haven assets like the greenback.
Despite the recent sharp losses, there remains potential for at least a temporary rebound. The Bloomberg Dollar Spot Index’s 14-day relative strength recently fell below 30, signaling to some that the greenback is now “oversold” and may be primed for a reversal.
In contrast to the dollar’s decline, the pound is on course for its best year since 2017, and the franc is set for its strongest annual performance since 2010. Sterling has gained over 5% against the dollar in 2023, marking its best performance since the tumultuous period surrounding Brexit votes six years ago. Meanwhile, the franc has reached record trade-weighted highs in Switzerland, as traders perceive the Swiss National Bank as holding a relatively tighter policy compared to its counterparts, even after a relatively dovish SNB meeting on Dec. 14.
Geoffrey Yu, a currency and macro strategist at BNY Mellon in London, commented, “If I had to pick a central bank most likely to intervene to push down their currency next year, it would be the SNB.” Regarding the pound, he added, “I won’t chase it aggressively until we get BOE clarity.”
