U.S. dollar
- The U.S. Dollar Index (DXY) declined during the fourth quarter. Signs of a gradual U.S. economic slowdown coupled with an expectation for Fed rate cuts in 2024 fostered the dollar’s decline; however, our bias remains for modest dollar upside in the first half of 2024.
- We expect the DXY to range-trade near current levels for most of 2024. However, we expect a downtrend in the latter half of the year as capital flows diversify away from the U.S. in a potential global economic recovery.
Developed currencies
- Better-than-expected U.S. inflation data and increasing market optimism of a Fed pivot into 2024 displayed the potential for the dollar’s erosion as expectations of lower interest rate differentials increase. Therefore, Fed policy actions in comparison to other major central banks over the next few months will remain a key point for the dollar’s near-term levels.
- We expect a range bound euro throughout 2024 and only mild yen appreciation. We believe that a U.K. recession will keep the pound weaker against the dollar next year.
Emerging currencies
- The Chinese yuan appreciated against the U.S. dollar late in the fourth quarter following months of continued concerns surrounding a still-lagging Chinese economic recovery. Currencies elsewhere in Asia followed the yuan’s rise.
- We continue to believe that sustained stronger performance in emerging market currencies may not be seen until 2024’s recovery cycle, with rates dropping in developed economies.