The US dollar is poised for its worst year since the onset of the pandemic, as Wall Street bets the Federal Reserve is set to lower interest-rates after safely reining in prices.
Having been whipsawed by false starts calling for the end of the Fed’s rate hiking regime, a Bloomberg gauge of the greenback is down nearly 3 per cent since January in the steepest annual drop for the US currency since 2020.
Much of the decline materialised in the fourth quarter on growing wagers that the Fed will sharply loosen policy next year as the US economy slows. That dents the dollar’s appeal, as other central banks may keep their rates higher for longer.
Swaps traders are now factoring in Fed rate cuts of at least 150 basis points, with the first cut coming as soon as March. That’s up from less than 100 basis points in mid-November and double what policymakers pencilled in at their most recent meeting. Among speculative traders, dollar positioning has become all the more bearish since the Fed’s December meeting.
“Markets are positioned for this ‘Goldilocks’ scenario where the Fed will cut rates enough to stimulate the economy without reigniting inflation pressures,” said Amanda Sunstrom, a fixed income and FX strategist at SEB AB in Stockholm. “That’s driving the dollar performance.”
Sunstrom added that the softer dollar is likely to persist in 2024 as US data weakens, but not enough to spur a risk-off bid for haven assets like the greenback.
Still, the dollar’s sharp losses of late suggest room for at least a temporary rebound. The Bloomberg Dollar Spot Index’s 14-day relative strength recently fell below 30, a signal to some that the greenback is now “oversold” and primed for a reversal.
On Thursday (Friday AEDT), Bloomberg’s dollar gauge edged higher for the first session in five as global bonds pared a recent run of gains. The yen and franc nonetheless advanced against the dollar, rallying more than 1 per cent intraday against the greenback in thin year-end trading.
The dollar’s fall stands in contrast to the pound, which is set for its best year since 2017, and the franc, on pace for its strongest annual performance since 2010.
Sterling has rallied more than 5 per cent against the dollar so far in 2023 – the best run since the British currency was whipsawed by a series of Brexit votes six years ago.
In Switzerland, the franc has risen to record trade-weighted highs as traders increasingly see the Swiss National Bank holding policy tighter relative to its counterparts, even after a relatively dovish SNB meeting on December 14.
“If I had to pick a central bank most likely to intervene to push down their currency next year it would be the SNB,” said Geoffrey Yu, a currency and macro strategist at BNY Mellon in London. As for the pound, “I won’t chase it aggressively until we get BOE clarity.”