Dollar’s dominant grip on FX markets to loosen further

BENGALURU, Dec 6 – The dollar will loosen its grip on other G10 currencies in 2024, with a dimmer outlook for the currency as the US Federal Reserve was expected to start cutting interest rates next year, a Reuters poll of FX strategists found.

Dominating currency markets since mid-2021, the dollar stayed relatively strong for the better part of this year but lost momentum after a few Fed officials made dovish comments last week.

Erasing all of its yearly gains, the dollar index fell 3.0% in November, its biggest monthly drop in a year.

Much of the greenback’s strength was down to the US economy’s superior performance compared to its peers. The world’s largest economy expanded at an annualized rate of 5.2% last quarter, the fastest pace since Q4 2021.

While analysts expected the currency’s weakening trend to continue into next year, median predictions in the Dec. 1-5 Reuters poll of 71 analysts showed a majority of the falls coming in the later part of 2024.

“We are looking for the dollar to weaken further next year, but we think the weakness will be more in the second half of next year,” said Lee Hardman, senior currency strategist at MUFG.

“In the first half of the year, we’re still relatively cautious about predicting a bigger dollar sell-off because we think the global growth story outside of the US still remains very, very weak and challenging.”

While predictions showed 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.

Among analysts who answered an additional question, 20 of 47 said interest rate differentials, 17 said economic data and seven said safe-haven demand. The remaining three gave varied reasons.

“We are at that turning point in the global economy and central bank policy that maybe it is creating more uncertainty over what’s going to be the key drivers for FX markets over the next six months,” added MUFG’s Hardman.

But beyond that time period, economic growth and currency valuations were likely to dictate currency moves.

“From Q2 onwards … we do think cyclical conditions globally will begin to improve and that should lead to markets moving away from being driven primarily by rate dynamics and move towards cyclical dynamics and valuations where the likes of EUR/USD and USD/CAD will all of a sudden look cheap on that basis,” said Simon Harvey, head of FX analysis at Monex Europe.

The euro EUR=, which is up 1.0% for the year was expected to end December at USD 1.08, around the same level it was seen trading on Tuesday.

It was then forecast to change hands at USD 1.09, USD 1.10 and USD 1.12 in three, six and 12 months gaining 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 gain 7.4% to trade at 137/dollar in a year.

Sterling, already up over 4.0% for the year was predicted to gain 1.7% to USD 1.28 in a year.

(Reporting by Hari Kishan; Polling by Prerana Bhat, Pranoy Krishna, and Anant Chandak:
Editing by Nick Zieminski)