Financial markets around the globe are grappling with an unexpected phenomenon in 2024: the resurgence of a strong dollar, which appears poised to maintain its momentum.
At the outset of the year, investors had foreseen a decline in the greenback, but the robust performance of the US economy and persistent inflation pressures have compelled a reassessment. The Federal Reserve’s reluctance to cut interest rates has also contributed to this shift in sentiment.
With the International Monetary Fund projecting that US output will outpace that of its Group-of-Seven counterparts, discussions surrounding “US exceptionalism” have gained traction.
This sentiment has bolstered stocks and bond yields, further enhancing the appeal of the dollar. Moreover, amidst escalating geopolitical tensions, the dollar retains its status as the ultimate haven.
According to a Bloomberg dollar index, the currency has appreciated by over 4% this year, marking gains against all major developed and emerging-market currencies.
A widely followed gauge of trader sentiment, initially bearish at the start of the year, has now turned bullish, reaching its highest level since 2019, as per data from the Commodity Futures Trading Commission.
Major players in the financial arena are adjusting their strategies in response to the dollar’s strength. Vanguard Group Inc., the world’s second-largest money manager, now anticipates sustained upward momentum.
UBS Asset Management suggests that the dollar could rise further, despite currently trading 20% above its typical valuation.
Meanwhile, Wells Fargo Investment Institute has abandoned its earlier predictions of a weakening dollar by year-end, now projecting a prolonged ascent into 2025.
Ales Koutny, head of international rates at Vanguard, commented,
“If other countries can’t match the growth and inflation of the US, there’s just no other option than to buy the dollar.
What was a very tactical trade for us before has become much more of a long-term structural view regarding sustained dollar and US economic strength.”
The dollar’s resurgence is fueled by indications that the US economy has sidestepped the slowdown that many had anticipated. The labor market remains robust, and manufacturing activity continues to expand.
In light of persistent inflation, Federal Reserve Chair Jerome Powell and his colleagues have postponed rate cuts longer than initially expected. New York Fed President John Williams has even raised the prospect of resuming rate hikes if deemed necessary.
