Line chart showing the performance of the dollar (DXY Index) from January 2014 to March 2024. The dollar traded in a volatile range of 80 to 105 from 2014 to 2020, specifically the dollar increased from near 80 in 2014 to about 100 in early 2015; it was rangebound between 95 and 105 from 2015 to 2017; between 2017 and 2018, the dollar trended lower from near 105 to 90; and from 2018 to 2020, it trended higher from 90 to 100. Between 2021 and September 2022, the dollar was on the rise, but reversed course in the fourth quarter of 2022. In early 2023, the dollar was rangebound, but the trend moved to dollar strength in the third quarter and reversed to dollar weakness in fourth quarter 2023. The chart includes the following call outs near the specified dates to specific events driving dollar performance: October 2014: Monetary policy divergence – Fed signals rate rises, while ECB moves to begin QE, June 2016: “Fed pause” – Dec 2015 to Dec 2016, November 2016: U.S. presidential election, June 2017: Market negative on pace of future Fed rate increases, April 2018: Twin deficit fears outweigh rate differentials, October 2018: 2018 dollar rise on firm growth versus Europe and Japan, steady Fed rate increases, December 2019: “Dovish pivot” from Fed caps DXY strength, March 2020: Extreme volatility as dollar weakness quickly reversed by a dollar surge driven by global liquidity squeeze, August 2020: Dollar extends weakness due to accommodative Fed policy, November 2020: U.S. presidential election, June 2021: Dollar bounce driven by rising U.S. inflation and Fed pivot toward rate increases, September 2022: Dollar index to 20-year highs on energy crisis in eurozone and Japan, October 2023: Dollar softening on market expectations for a Fed pivot.
Sources: Bloomberg and Wells Fargo Investment Institute. Daily data from January 1, 2014, to March 31, 2024. The DXY Index measures the value of the U.S. dollar relative to major developed market currencies, notably the euro, the Japanese yen, and the British pound. Fed = Federal Reserve. ECB = European Central Bank. QE = quantitative easing. DXY = U.S. Dollar Index. An index is unmanaged and not available for direct investment. Past performance is no guarantee of future results.
Key Takeaways
- Our bias remains for continued dollar strength through 2024, supported by a stronger U.S. economy versus that of developed markets ex-U.S. We expect the dollar to find support while U.S. interest rates exceed those in the eurozone and Japan.
- A moderating interest rate environment in emerging markets (EM) may provide a broad negative driver to EM currencies in 2024. Still, we believe a stronger economic environment in the second half of 2024 may benefit EMs and help offset the interest rate environment to drive EM currency gains.