The U.S. dollar is set to experience its first weekly decline in 2024, signaling a potential weakening of the currency in the coming months. This decline comes as investors adjust their expectations for future Federal Reserve rate cuts, which had previously driven the dollar’s value up. On the other hand, the Japanese yen is experiencing its fourth consecutive weekly drop as investors seek higher yields elsewhere, betting that Japan’s interest rates will remain near zero for the foreseeable future.
Analysts suggest that the dollar retracement in 2024 has been more significant than the decline in U.S. yields, indicating that further strength in the dollar may be limited. Athanasios Vamvakidis, global head of G10 forex strategy at BofA Global Research, believes that the dollar will start to weaken in the second quarter of the year, assuming that the Fed will cut rates in June and continue to do so quarterly. BofA expects the euro to strengthen against the dollar to 1.15 by the end of the year.
However, if the U.S. economy remains strong, this view may need to be revised as the Fed may not be able to cut rates in June or even throughout the year. The dollar index, which measures the U.S. currency against six others, rose slightly to 103.96 but is on track for its first weekly fall since December.
The next major release that could provide further clues for U.S. monetary policy is the Personal Consumption Expenditures (PCE), which is the Fed’s preferred inflation gauge. This release, due next week, will be closely watched by investors.
In terms of other currencies, analysts suggest that the euro zone’s recovery is slow but cannot ignore Germany’s economic downturn. They believe that currencies like the Norwegian crown, Swedish crown, and Polish zloty may be better buys than the euro. The Swedish crown reached its highest level since January and the Norwegian crown is also performing well.
The yen, on the other hand, has been the worst-performing G10 currency this year, with a 6.3 percent slide against the dollar. This is due to investors borrowing yen at low interest rates and investing in income-bearing assets in other currencies. Last week’s data showing an unexpected slide into recession in Japan has further dampened hopes for a yen rally.
Overall, with volatility in foreign exchange markets decreasing and expectations for deep rate cuts fading, investors are focusing on carry trades in a range-bound environment. The flow into higher-yielding currencies has also benefited the Australian and New Zealand dollars. Despite steep cuts to Chinese mortgage rates, China’s yuan has remained stable against the dollar.
In conclusion, the U.S. dollar is poised for its first weekly decline in 2024 as investors adjust their expectations for future Federal Reserve rate cuts. The yen continues to weaken, while other currencies like the euro, Norwegian crown, Swedish crown, and Polish zloty may offer better opportunities for investors. The market is currently focused on carry trades and higher-yielding currencies, with the flow into these currencies benefiting the Australian and New Zealand dollars.
