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.
After being 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 penciled in at their most recent meeting.
Among speculative traders, dollar positioning has become all the more bearish since the Fed’s December meeting.
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, 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.
