It was supposed to be the forecast of the U.S. dollar's decline this year, yet that actually only manifested itself in the last two months of the year. And that's after the Fed took more time to really be convinced of the process of slowing inflation.
And with the aggressive way to price interest rate cuts since November That sent the dollar down quite a bit after a strong rally in the bulk of 2023 as the dollar index that tracks the greenback against six major currencies fell to a new five-month low of 100.70 at the time of writing and the index is heading for a 2.6% decline this year, ending that. The Japanese yen, of course, is the exception, with the dollar against the yen rising by a strong 8.5% so far, especially after the Bank of Japan's many and repeated disappointments, and given the dramatically different monetary policy of both banks, which so far is considered to be in favor of the US Federal Bank.
On the contrary, it is European currencies that take full advantage of the dollar's decline.
It comes despite the fact that markets are also seeing faster rate cuts by the ECB and the Bank of England heading into next year. The difference is that perhaps the narrative of low inflation is not as prevalent as in the United States, making the condemnation of rate cuts by the Fed much stronger.
That's especially after a change in language by Fed Chairman Powell at this year's last FOMC meeting and also from point expectations.
The question here is, then, will the depreciation of the dollar, as we have seen in the past two months, continue through the new year? And will that be the main story in circulation for 2024?
For now it looks like the process of cutting inflation will continue uninterrupted, and that helps spur risky trading as well. In other words, where traders now choose to sell the dollar and buy everything else.
The next key thing to watch is how the global economy performs.
And right now the fact that a soft landing is a potential scenario also helps ease the pessimism on hazardous assets. Indirectly, this is a dollar headwind itself.
But if there are growing concerns that a soft plunge could turn into something worse, it could help turn things around for the dollar, and also big shifts for the rise of stocks and indexes.
For now, it's important to recognize that markets are treated as if the dollar's decline will be the main topic in trading next year.
This is evident by pricing in interest rates and central banks in the last few weeks, and any change or surprise in this narrative may turn the table too strongly in favor of the US dollar.
