The US dollar initiated the new year with its most significant single-day surge since March, gaining over 0.7% on Tuesday, according to the Bloomberg Dollar Spot Index. This uptick came as traders scaled back expectations regarding the extent of the Federal Reserve’s interest-rate reductions anticipated in 2024. The greenback’s robust performance marked its most substantial daily advance since the regional banking turmoil more than nine months ago.
The start of 2024 stands in contrast to the challenges faced by the dollar in the previous year, where its performance was largely shaped by speculation around when and to what extent major central banks would reduce their key policy rates. The dollar experienced a 2.7% decline in 2023, marking its weakest annual performance since the shocks of the Covid-19 pandemic in 2020.
Brad Bechtel, the global head of foreign exchange at Jefferies, commented on the varied expectations surrounding the Federal Reserve, stating, “The Fed expectations are still all over the map. We have to see how it plays out in the next few days.”
Traders are eagerly anticipating the release of minutes from the December Fed meeting, scheduled for Wednesday, which is expected to provide insights into a meeting where officials signaled the conclusion of their aggressive interest-rate increase campaign. Additionally, labor-market data due later in the week is anticipated to shed light on a job market that remains robust while gradually cooling.
The dollar strengthened against every Asian emerging-market peer on Wednesday, with the South Korean won, Malaysian ringgit, and Thai baht being among the most significant losers against the greenback.
Despite the previous year’s decline in the dollar driven by increased expectations of an easing cycle, traders are now reassessing the future path of monetary policy. While central banks have hinted at delivering the final hikes of this cycle, they remain cautious about relinquishing the fight against inflation too soon.
Helen Given, an FX spot trader at Monex USA, highlighted the uncertainty prevailing in the markets at the beginning of the year, stating, “Markets, with the fledgling year, haven’t entirely decided what their base case is. We still don’t believe the Fed will be cutting rates as soon as March, and the minutes tomorrow are likely to prove us to be more correct than not.”
