03.01.202410:59 Forex Analysis & Reviews: US dollar may weaken in 2024

The Fed's dovish turn in December increased the chances of dollar continuing to fall in 2024. However, the strength of the US economy may limit the decline.

Dollar's 2% tumble last year marked its first annual decline since 2020. This happened after Fed Chairman Jerome Powell announced the end of a tight monetary policy, all thanks to easing inflation.

And since dollar possesses a key role in global finance, its movement affects many things. For example, its weakness undoubtedly makes US exports more competitive abroad and increases the profits of multinational corporations, cheapening the conversion of their foreign profits into dollars. FactSet said about a quarter of companies in the S&P 500 index generate more than 50% of revenues outside the United States.

A Reuters survey also stated that dollar may fall against G10 currencies in 2024, and most of its decline will occur in the second half of the year. However, this depends on how the US economy behaves compared to its global counterparts, as well as on the speed with which central banks adjust monetary policy. So far, the picture has been uneven.

In the eurozone, reports indicated an exacerbation of the downturn in business activity, which signals recession. Despite this, the ECB spoke against lowering rates, as it remains focused on combating inflation.

In Asia, particularly in India and China, accelerated economic growth could increase the countries' demand for raw materials, which will benefit commodity currencies such as the Australian, New Zealand, and Canadian dollars. State media reports in China also said the government plans to strengthen policy adjustments to support economic recovery in 2024.

Most likely, there will be a slowdown in economic growth in the US and an acceleration in economic growth in China in the current new year. The International Monetary Fund's forecast said the former will grow by 1.5%, while the latter will grow by 4.2%. The eurozone will grow by 1.2%

The trajectory of dollar may depend on how much the Fed will ease interest rates and how much inflation decreases. Investors see a rate cut of more than 150 basis points, about twice as much as the Fed planned. If inflation stops and does not continue to decrease, the Fed will have to restrain itself, which will be a bullish event for dollar.