U.S. Dollar Outlook for 2024

Despite a strong start to the year, analysts suggest that the U.S. dollar is expected to depreciate over the course of 2024.

Dollar's Performance and Expectations

According to Dow Jones Market Data, the ICE U.S. Dollar Index DXY, which measures the currency against six major rivals, has seen a 2.1% increase since the beginning of the year.

Analysts from BofA Global Research attribute this rise to traders revising their expectations of when the Federal Reserve will initiate interest rate cuts. Previously, there was a high probability of a rate cut in March, reaching as high as 90%. However, as of Friday, the CME FedWatch Tool indicates a reduced likelihood of around 46%. Additionally, the expected amount of rate cuts for the year has decreased from 170 basis points in mid-January to approximately 135 to 150 basis points.

Predictions for the Greenback

In a recent note, analysts from an investment bank stated that they anticipate the U.S. dollar to steadily depreciate throughout the rest of 2024. They also note that much of this decline is likely to occur in the second half of the year.

The Outlook for the US Dollar in 2024

Analysts from Bank of America (BofA) have shared their predictions for the US dollar's performance this year and believe that a recession is unlikely. They anticipate that the Federal Reserve will begin reducing its key policy rate in March. However, this scenario is seen as negative for the dollar, as the Fed's easing measures are expected to support risk assets while U.S. economic growth remains strong.

According to historical data, the performance of the ICE U.S. Dollar Index has been mixed after the Fed's first rate cut in previous cycles. On average, it has remained relatively flat over the following quarters. This is partly due to the perception of the US dollar as a safe haven asset with a negative correlation to risk. The analysts mention that cutting cycles have often coincided with recessions.

Jonathan Petersen, senior market economist at Capital Economics, also agrees with this viewpoint. In a note published on Thursday, he predicts that the US dollar will face challenges from strong risk appetite in global markets and declining bond yields in the US throughout the year. As a result, Petersen expects the greenback to trade within a range against most major currencies for the majority of 2024.