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The USD hit its 20-year high in 2023, reaching 114.78. Even the Dollar Spot Index increased by 0.4% in September 2023. According to a Forbes report, the uptrend is expected to continue as we move into 2024, but it is still not certain.
In this article, we review the top predictions for USD in 2024 and understand if the Dollar will remain strong in the coming year.
USD could weaken against the EUR
In 2024, the US Dollar is anticipated to experience a modest depreciation against the Euro while the Euro gains momentum, according to financial experts in the Wall Street Journal. The Dollar could weaken, attributing it to lower federal interest rates and a globally fragile economy, favoring high-volatility currencies.
Conversely, it is also anticipated that the Euro can strengthen as Europe avoids a recession, fostering risk appetite. The recovery of the European economy from the energy shock is expected to align with market consensus, supporting the currency’s resurgence.
Analysts at Bloomberg have also further asserted that the Euro’s ascent is fueled by the weakening US Dollar and declining US Treasury yields. The persistent drops in Eurozone bond yields hinder the Euro’s prolonged gains, but a further decline in US bond yields could alleviate this effect.
According to the same Bloomberg report, there is a forecasted substantial 10% climb in the Euro in 2024, reaching $1.21. As per Pound Sterling Live, Bank of America concurs with a bearish outlook on the US Dollar, expecting the Euro to surpass the 1.10 level and rise toward fair value. Their analysts anticipate three Federal Reserve rate cuts, asserting that these cuts will exert a more pronounced impact on the US Dollar compared to other currencies, supporting risk sentiment and a weaker Dollar trend.
Morgan Stanley holds a bearish view on EUR/USD
Morgan Stanley maintains a bearish stance on the EUR/USD for 2024, countering Bank of America’s bullish outlook. The forecast hinges on several factors, including continued US growth outperformance, perceived challenges in the USD weakness pathway through early 2024, shifting global growth asymmetry with declining real policy rates, and technical recessions in the Eurozone, Sweden, and the UK leading to anticipated rate cuts in Q2 2024. Morgan Stanley foresees EUR/USD returning to parity in Q1 of 2024 and hovering around that level for most of the year, reflecting their cautious view amid prevailing economic conditions.
Furthermore, as per the US Bank, despite the US Dollar’s recent 4% decline since its October 2023 peak and retracement of half its gains since July, the report asserts that this correction is temporary. Affirming the US Bank’s and Morgan Stanley’s contrarian view, they anticipate the USD strengthening by an additional 8% against the Euro. They attribute this anticipated decline to sustained growth and rate differentials widening, emphasizing that the market is not adequately pricing in these factors.
Goldman Sachs predicts a strong US Dollar
Goldman Sachs Research highlights the US Dollar’s resilience in 2023 and continued strength in 2024. The US economic outperformance, with a projected 2.1% growth in 2024, surpassing consensus estimates, is a key factor driving this view. The report emphasizes that most cross-border fund flows are directed into the US, reflecting the nation’s economic strength compared to Europe and China.
Goldman Sachs Research also sees the global economy outperforming expectations in 2024, further supporting the US Dollar. The firm notes that a buoyant labor market and cooling inflation contribute to a positive economic outlook. With GDP growth forecasted at 2.6%, higher than the consensus, and US growth expected to outpace developed market peers, foreign investor interest in US assets and currency is likely to persist.
The research also highlights the US economy’s projected soft landing in 2024. The firm attributes this to correct inflation management, increased labor supply, and strong demand for goods and services. The expected steady interest rates until the last quarter of 2024 further underline the positive outlook, indicating confidence in the economic trajectory.
USD to continue rising against the JPY
The USD is anticipated to continue its ascent against the Japanese Yen (JPY) in 2024, following a notable rally since mid-July 2023. Driven by the shift in expectations regarding US interest rates, the USD has gained over 6% against major currencies, defying earlier predictions of a weakening Dollar.
The upward trajectory is linked to the surprising resilience of the US economy and persistent inflation pressures, leading to a reversal in interest rate differentials with other major countries. The Bank of Japan’s mixed signals and retention of the yield curve control policy have contributed to the JPY’s weakness. As the Federal Reserve maintains its tight monetary policy stance, the USD’s strength will likely persist until underlying fundamental factors driving its ascent undergo significant changes.
US Dollar index to remain bullish
The Intercontinental Exchange US Dollar Index (DXY) is anticipated to maintain its bullish momentum in 2024, building on a recent surge that saw it standing at the 103 mark as of 24 May 2023. As per JP Morgan, despite a 7% decline from its 10-year high in September 2022, the DXY’s resilience is attributed to the US Federal Reserve’s aggressive monetary contraction policy, which raised interest rates by 425 basis points throughout 2022.
The Federal Reserve’s recent series of 25 basis points hikes in 2023 may signal a potential halt to rate increases, along with a slowdown in inflation rates and concerns about a looming US recession. This has prompted a pullback from the DXY’s peak.
Inflation concerns have increased consumer prices, driven by supply-chain bottlenecks, energy price surges, and global geopolitical events. With the Fed expected to continue raising rates, there’s a consensus that the USD will remain strong, supported by ongoing investor demand for US assets. Analysts at JP Morgan project varying outcomes, with some anticipating a decline in the DXY amid global recession risks, while others expect continued strength driven by high macroeconomic uncertainty and persistent US inflation.
USD against GBP to be a good buying the dip trade
Based on a comprehensive analysis of various factors influencing the currency pair’s dynamics, the GBP/USD pair appears poised for a favorable buy-the-dip trade in 2024. After rebounding from a four-decade low in 2023, GBP/USD’s potential is underscored by the contrasting policy outlooks of the Federal Reserve (Fed) and the Bank of England (BoE). The US Dollar faces potential weakening due to the Fed’s dovish pivot, marked by indications of impending rate cuts and concerns about economic activity.
In contrast, as per Forbes, the BoE, despite past tightening measures, faces uncertainties related to UK elections and economic challenges. The GBP/USD’s 2023 recovery, attributed to factors like persistent UK inflation and the BoE’s hawkish stance, set the stage for a nuanced outlook.
Traders need to focus on key considerations, including potential interest rate cuts by both the Fed and BoE, as suggested by market expectations. The US and UK economic outlooks, marked by growth concerns and political uncertainties, further contribute to the GBP/USD’s potential as a buy-the-dip opportunity.
USD to fall against gold, shifting investors
Gold is poised for an upward trajectory in 2024 as investors pivot towards the precious metal amidst geopolitical concerns and a weakening US Dollar. Experts from ING Think predict a rise in gold prices, propelled by heightened global uncertainty, a slightly weaker Dollar, and potential interest rate cuts by the US Federal Reserve. The World Bank Commodity Outlook suggests that escalating conflicts in the Middle East could significantly drive up gold prices due to increased demand for less risky assets.
As per the Financial Times, the Fed will keep its interest rates at a 22-year high until mid of 2024, which will likely mean that if the US experiences substantial economic decline and unexpected interest rate cuts in the first half of 2024, it could create a supportive environment for gold, leading to a stronger price outcome than forecasted. Additionally, factors such as central bank actions, currency movements, and geopolitical tensions are crucial to monitor, shaping the gold market in the coming year.
BoA report shows that the USD is overvalued; correction in 2024
Bank of America’s (BoA) 2024 outlook signals a bearish stance on the US Dollar, diverging from the consensus and anticipating a correction. Contrary to a more bullish Dollar outlook in 2023, it is now expected that US economic growth will moderate, contributing to a diminished performance gap against other nations.
As the dollar is perceived as overvalued according to BoA’s models, an unwinding process is expected, propelling the Euro-Dollar exchange rate to 1.15 in 2024.
However, potential risks include the US economy outperforming expectations, delayed Fed cuts, and persistent inflationary pressures. The unknowns of the US election in 2024 also loom, introducing an element of overall volatility in the USD. Despite the Eurozone’s relatively weak economic outlook, Bank of America’s forecast pivots on the narrative of a slowing US economy rather than a Eurozone acceleration. Fiscal consolidation is identified as a more distant risk for the Euro, potentially materializing in 2025 and not 2024.
If the Fed pivots too much, the USD might be dovish
The Federal Reserve’s recent shift toward a dovish stance in December 2023 has heightened concerns about the vulnerability of the US Dollar in 2024. The dovish pivot, marked by Fed Chairman Jerome Powell’s indication that the era of historic monetary policy tightening is likely over, projects 75 basis points of cuts in the coming year. This move, aimed at addressing cooling inflation, is perceived as a potential headwind for the Dollar, making US assets less appealing to yield-seeking investors.
While a weak Dollar is anticipated, the robustness of the US economy remains a mitigating factor that could temper the anticipated decline. The Federal Reserve’s earlier aggressive tightening and post-pandemic growth initiatives had fueled a powerful Dollar rally. As the Fed now signals a policy easing, there’s a suggestion that some of the previous gains could be reversed.
Investors, however, tread cautiously, considering the unpredictability of the Dollar’s trajectory in recent years. The outcome hinges on the pace of central bank adjustments globally and the comparative performance of the US economy in 2024. The International Monetary Fund’s forecast underscores a growth rate of 1.4% for the US in 2024, presenting a variable landscape for the Dollar’s trajectory, influenced by inflation dynamics and the extent of already factored-in Fed easing.
What is the uptake for USD in 2024?
In 2024, the USD is anticipated to sustain strength, but a looming market correction for its overvaluation may temper significant gains. The likelihood of interest rate cuts could contribute to the Dollar’s stability rather than substantial appreciation. A delicate balance is expected, with the market correction and potential rate adjustments mitigating extremes in the USD’s performance.
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