The US dollar has been strengthening since 2024. Here’s why I don’t think it will last:
Although the U.S. dollar has been relatively strong since 2024, some analysts still believe it is unlikely that the dollar will depreciate throughout the year.
ICE US Dollar Index DXY,
The company, which tracks the currency against six of its major competitors, is up about 2.1% so far this year, according to Dow Jones Markets data.
The dollar rose as traders scaled back expectations for when the Federal Reserve will begin cutting interest rates this year, according to analysts at BofA Global Research.
As recently as late December, traders were projecting up to a 90% chance of a March rate cut, but as of Friday that chance had fallen to about 46%, according to the CME FedWatch tool. Meanwhile, the total interest rate cut this year, which reached 170bp in mid-January, has now been lowered to the 135-150bp level.
But analysts at the investment bank said in a note Thursday that the dollar is likely to decline for the rest of the year, adding that most of the decline is likely to occur in the second half of 2024.
BofA analysts said they do not expect a recession this year and expect the Federal Reserve to begin cutting interest rates in March. According to analysts, such a scenario is negative for the dollar as the Federal Reserve’s easing measures are likely to support risk assets while maintaining the recovery in U.S. economic growth.
Historical data shows that the performance of the ICE U.S. Dollar Index has been mixed since the beginning of the Federal Reserve’s first rate cut in the past six cycles and has been relatively stable on average over the following quarters, analysts said.
“This is in large part due to the USD being perceived as a ‘safe haven’ and negatively correlated with risk. “Because interest rate cut cycles are often associated with recessions,” they wrote.
Jonathan Petersen, chief markets economist at Capital Economics, reiterated this point in a note Thursday. He expects the dollar to face headwinds throughout the year due to strong risk appetite in global markets and falling U.S. bond yields, and expects the dollar to remain fluctuating against most major currencies for most of 2024.
