Our FX team says that 2024 should be the year US exceptionalism wanes and that currencies outside of the US refloat. Just as the gravitational force of the moon draws out the tide, so has the enduring strength of the US economy drawn portfolio capital from the rest of the world
The dollar's long goodbye
This time last year, we were forecasting fewer trends in global FX markets and more volatility. In fact, 2023 has proved a year of two halves: the first half more trendless and the second half characterised by a very orderly and powerful dollar bull trend.
This dollar rally has been built on the exceptionalism of the US economy – registering an incredible growth rate of 4.9% quarter-on-quarter annualised in the third quarter. And despite headline inflation dipping, there is really not enough evidence, yet, for the Fed to drop its hawkish guard. Holding dollars has therefore become the ‘no-brainer’ trade as investors price slowing aggregate demand globally – a theme that has weighed on the more open economies and currencies of Europe and Asia.
Will this theme continue into 2024? It feels like a wrestling match and the dollar will not roll over that easily. Yet our simple thesis is that tighter interest rates finally catch up with the US economy next year, growth registers a paltry 0.5% and the Fed, in line with its dual mandate to focus on inflation and maximum employment, cuts rates back into less restrictive territory. We forecast 150bp of Fed easing next year starting in the second quarter.
The end of US exceptionalism will allow greater diversification amongst the investor community and a lower bar to seek returns outside of the dollar. Portfolio capital can refloat some of those stranded non-dollar currencies. Our baseline view for 2024 sees the dollar bear trend picking up pace through the year. Compared to year-end 2024 forwards, currencies could be as little as 2% (China’s renminbi) to as much as 13% (Scandinavian FX) firmer against the dollar.
For all of the latest details, take a look at our team’s full FX Outlook, which covers the G10, EMEA, Asia and Latam regions and insights into key local factors, such as elections, the fiscal-monetary mixes and the FX preferences of the local authorities – all of which will shape FX trends next year.