Investors betting on a weakened dollar in expectation of a series of US interest rate cuts are left disappointed as the currency shows no sign of falling since a robust US economy sustains its ‘jaw-dropping’ US$ strength.
The dollar index, which pits the currency against a basket of several peers, is up 2.4 percent in the year-to-date. The Commodity Futures Trading Commission said in its latest commitments of traders report on Thursday that net dollar bets in futures markets had become favorable for the first time since late November.
The growing resilience of the US economy is powering all this, which is keeping the Federal Reserve from tightening monetary policy. US gross domestic product grew 3.2 percent annually in the fourth quarter, compared with stagnation in the eurozone and slowdowns in China and Japan. The improved prospects for the US serve as a magnet for demand for the dollar as a global safe-haven asset.
Thierry Wizman, global FX and rates strategist at Macquarie, has been one of the few to quantify this shift: ”There is no significant evidence Europe and China are picking up,” he said. ”That’s the reason people have had this change of heart” towards the dollar.
The dollar could have more fireworks ahead this week, with Federal Reserve chairman Jerome Powell set to testify to lawmakers and then with the US employment numbers, which could help solidify the dollar’s recent gains in one direction or another. Any sign that the Fed remains committed to an ‘insurance cut’ or a more robust reading of job growth could strengthen the dollar’s recovery.
But although investors have become less likely to expect rate cuts by the Fed in 2024, the dollar’s resilience remains a point of debate among strategists. Ugo Lancioni, global head of currency at Neuberger Berman, still believes the dollar will do well. According to Lancioni, the strength of the US dollar is justified by the fact that the US economy performs so much better than others.
But a mighty dollar is less likely to resonate well beyond the foreign exchange markets: a stronger dollar could cut into the earnings generated by US multinationals and exporters, which might discourage foreign profits, and American products could suffer from export uncompetitiveness overseas.
Furthermore, a resilient dollar pressures other central banks trying to fight inflation. With inflationary pressures proving sticky in the eurozone, the ECB is under pressure to taper its bond-buying program, which in turn strains the broader economic recovery.
Still, while this sounds bearish, not everyone is ready to give up on the dollar despite continuing signs of decline. Paul Mielczarski, head of macro strategy at Brandywine Global, believes the dollar’s rebound to be a ”tactical rally as opposed to a change in the underlying trend overall.”
Geopolitics could move the dollar the other way too, including the outcome of this year’s US presidential election, if Donald Trump wins a second term of office or the Democrats’ ‘blue wave’ seizes control of the White House or Congress. Capital Economics analysts believe that! Only the future course of his foreign policy could bring the dollar back into focus, depending on whether Trump increases tariffs, triggering a safe-haven flow into the dollar.
Despite the dollar’s persistent detractors, recent trends also highlight the difficulty of betting against the greenback. Given the extent of change in the world economy, everyone is watching to see what will happen to the US economy next and what that could mean to the dollar.
Source: Saqib Iqbal Ahmed, Reuters March 5, 2024
