Wall Street Banks Divided on US Dollar's Future After Fed Signals Rate Cuts in 2024: Here's Why
After the Federal Reserve expressed dovish comments, Wall Street banks are predicting a possible weakening of the US dollar. Nevertheless, some large banks have taken a different position than the general consensus and believe the US currency will grow stronger in the coming year.
Fidelity and JPMorgan Bet on Stronger Dollar
● The Rest of World Struggle with Inflation and High-Interest Rates
This view on the dollar is emerging, based on expectations that the rest of the world will struggle with higher interest rates more than the US and move closer to a recession. The European Central Bank, Bank of England, and Swiss National Bank have all recently announced their decisions to keep key interest rates unchanged, suggesting that they are willing to hold them at the current levels for as long as necessary to combat inflation.
Meanwhile, Argentina is experiencing annual consumer inflation that soared to an alarming 160.9% in November, marking a new record high. In response, the country's central bank has raised its benchmark interest rate several times this year, with the latest increase bringing it to 133%.
● Wider Rate Differentials
The Federal Reserve is planning 75 basis points in rate cuts by 2024, but dollar bulls expect similar or even quicker reductions from other major economies, creating wider rate differentials.
Traders now predict 150 basis points of US rate cuts over the next year, up from under 100 basis points before the policy meeting. However, this still lags behind the 155 basis points of cuts predicted for the ECB and emerging-market central banks from Mexico to Brazil.
We do think that Europe and the UK are closer to recession," said George Efstathopoulos, a Fidelity money manager who is positioned for further greenback strength against the euro and sterling. "It's clear that the dollar always get a bid when this happens" as it becomes a haven, he said.
● Tariff Expansion
$JPMorgan(JPM.US$ predicts that a divisive US election contest between President Joe Biden and former President Donald Trump will increase the prospects of a trade war, potentially boosting the dollar's strength.
The bank believes that any expansion of US economic tariffs on nations beyond China could have an outsized effect on the dollar, particularly in regions such as Europe, Mexico, and Asia. For instance, a universal 10% tariff could lead to a 4% to 6% increase in the greenback's trade-weighted value as growth-sensitive currencies struggle due to the widening trade war.
Renewed tariff risk will be dollar positive," the strategists wrote. "While the focus on CNY will persist, there is scope for broadening to other FX more directly."
Dollar Bearishness Grows Among Goldman and Hedge Funds
● Rate-Sensitive
$Goldman Sachs(GS.US$ has joined the growing number of analysts who expect a weaker dollar as the Federal Reserve moves towards non-recessionary rate cuts. "Our new forecasts incorporate more dollar weakness than before," Goldman analystMichael Cahill wrote. Goldman's now anticipate up to five rate cuts, and the markets have priced in as many as six.
This shift in sentiment is also reflected in hedge funds and other large speculators, who have taken a net short position against the dollar for the first time since September, according to Commodity Futures Trading Commission data as of December 12.
● European Economy Recovery
Indosuez Wealth Management's head of active advisory, Muriel Aboud Schirmann and investment strategist Maxime Garcia predict a mild depreciation for the dollar and a potential momentum gain for the euro in 2024, according to their outlook report for next year.
We expect the dollar to depreciate slightly in 2024, as lower federal interest rates and a weak global economy may favour high-beta currencies, "they said. "We believe that the European economy will recover from the energy shock and regain a better balance with the rest of the world, with our growth scenario in line with market consensus, which should slowly support the currency's recovery."
Source: Bloomberg, WSJ
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Timtan85 : Maybe dollar strengthen further i remember it was $1.70 many years ago
103750432 : $Basin Energy Ltd (BSN.AU)$
SpyderCall Timtan85: I am with Goldman. I think that the lower borrowing costs coming from lower interest rates will decrease demand for the dollar and ultimately decrease its value.
But if the US economy starts showing improvement, then that will strengthen the dollar. 2024 is going to be interesting.
Timtan85 SpyderCall: Interesting. Thanks for your thoughts. Gd insight. I used to be an RM in uob nice to meet u
SpyderCall Timtan85: I only share the same thoughts as Goldman. I don't actually work with them
.... Is an RN a "Registered Nurse?"