The dollar is preparing for its worst year since 2020

He dollar is headed for its worst year since the start of the pandemic, while Wall Street is betting that the Federal Reserve will lower interest rates after controlling prices.

After swinging due to flawed projections about the end of the Fed’s rate-hike regime, a Bloomberg dollar indicator is down nearly 3% this year, the steepest annual drop for the U.S. currency since 2020.

Much of the decline materialized in the fourth quarter due to growing bets that the Fed will ease monetary policy next year as economy slows USA. That undermines the dollar’s appeal as other central banks can keep their rates higher for longer.

Patrick Harker: “We must keep rates where they are and start lowering them”

The dollar throughout the year 2023 in the United States

Swap traders now pricing in haircuts Fed rates of at least 150 basis points, the first of which would occur in March. That’s up from projections of less than 100 basis points in mid-November and double what policymakers had forecast at their most recent meeting. Among speculative traders, dollar positioning has become even more bearish since the Fed’s December meeting.

“Markets are positioned for this ‘Goldilocks’ scenario in which the Fed will cut rates enough to stimulate the economy without reigniting inflationary pressures,” said Amanda Sundstrom, fixed income and currency strategist at SEB AB in Stockholm. . “That is driving the performance of the dollar.”

Sundstrom added that dollar weakness is likely to persist into 2024 as U.S. data weakens, but not enough to spur a bet on safe-haven assets like the dollar.

More Fed bankers dismiss bets on rate cuts

Still, the dollar’s recent losses suggest there is room for at least a temporary rally. The Bloomberg Dollar Spot Index’s 14-day Relative Strength Index recently fell below 30, a sign to some that the currency is now oversold and ready for a reversal.

Looking ahead, the dollar could fluctuate ahead of the US presidential election in November, according to Koji Fukaya, a member at Market Risk Advisory Co. in Tokyo. In particular, the presence of Donald Trump as a candidate could cause political unrest and inject volatility into the currency, he said.

Rate divergence

The dollar’s decline contrasts with the pound, which is heading for its best year since 2017, and the franc, which is on track for its strongest annual performance since 2010.

Sterling has strengthened more than 5% against the dollar so far in 2023, the biggest gain since the UK currency strengthened 9.5% in 2017.

The US Federal Reserve maintained interest rates: why it is good news for Milei

In Switzerland, the franc has risen to record trade-weighted highs as traders increasingly expect the Swiss National Bank to maintain a tighter policy vis-à-vis its counterparts, even after the December 14 meeting had a relatively expansive tone.

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