US Dollar Might Face Wost Yearly Decline Since 2020; All Eyes On Fed Rate Cuts: Report

The US dollar may face its most challenging year since the onset of the pandemic, with Wall Street anticipating a downturn fuelled by expectations of Federal Reserve rate cuts. The greenback, as measured by a Bloomberg gauge, has seen a nearly 3% decline since January, marking the steepest annual drop since 2020.

The decline, particularly in the fourth quarter, is attributed to a growing belief that the Fed will adopt a more accommodative policy in response to a slowing US economy. This anticipation diminishes the Dollar's allure, especially as other central banks consider maintaining higher interest rates for an extended period.

Swaps traders are now factoring in potential Fed rate cuts of at least 150 basis points, with the first cut possibly occurring as early as March. This represents a significant shift from mid-November when the expectations were below 100 basis points. Speculative traders have become increasingly bearish on the Dollar, with positioning taking a more pessimistic turn after the Federal Reserve's December meeting.

Amanda Sunstrom, a fixed income and FX strategist at SEB AB in Stockholm, commented on the prevailing market sentiment, stating, "Markets are positioned for this 'Goldilocks' scenario where the Fed will cut rates enough to stimulate the economy without reigniting inflation pressures. That's driving the dollar performance." She predicts that the softer Dollar is likely to persist in 2024 as US economic data weakens, although not enough to trigger a risk-off bid for safe-haven assets.

Despite the recent losses, some analysts suggest that the Dollar might experience a temporary rebound. The Bloomberg Dollar Spot Index's 14-day relative strength recently fell below 30, signaling to some that the greenback is now "oversold" and may be due for a reversal.

In a recent session, Bloomberg's Dollar gauge edged higher for the first time in five sessions as global bonds retraced recent gains. However, the yen and franc continued to advance against the dollar, rallying more than 1% intraday in thin, year-end trading.

The Dollar's descent stands in stark contrast to the pound, which is on track for its best year since 2017, and the Franc, poised for its strongest annual performance since 2010. Sterling has surged more than 5% against the Dollar in 2023, marking its best run since the currency was impacted by a series of Brexit votes six years ago. Meanwhile, in Switzerland, the Franc has reached record, trade-weighted highs as traders increasingly believe the Swiss National Bank will maintain a tighter policy relative to its counterparts, even after a relatively dovish SNB meeting on December 14.

Geoffrey Yu, a currency and macro strategist at BNY Mellon in London, shared his insights on the situation, stating, "If I had to pick a central bank most likely to intervene to push down their currency next year, it would be the SNB." Regarding the pound, he added, "I won't chase it aggressively until we get BOE clarity," highlighting the cautious approach adopted by investors amidst the evolving global economic landscape.

*Inputs from Bloomberg*