After soaring to its highest level in two decades thanks to strong interest rate hikes by the US Federal Reserve (Fed) in 2022, the US dollar has begun to reverse to a downward trend as investors Investors are increasingly confident in the possibility that the Fed has completed the cycle of tightening monetary policy, and will soon move to cut interest rates.

The US dollar is forecast to face the risk of weakening in 2024, while Asian currencies such as the Japanese yen and yuan could be headed for a strong recovery.

The US dollar faces the risk of weakening

After soaring to its highest level in two decades thanks to strong interest rate hikes by the US Federal Reserve (Fed) in 2022, the US dollar has begun to reverse to a downward trend as investors Investors are increasingly confident in the possibility that the Fed has completed the cycle of tightening monetary policy, and will soon move to cut interest rates.

The most notable turning point came in December 2023, when Fed Chairman Jerome Powell said the historic tightening of monetary policy that brought interest rates to their highest level in decades may have ended, amid the Inflation gradually cools down. Policymakers are now expected to cut interest rates by 0.75 percentage points in 2024.

These expectations have caused the US dollar to fall sharply in recent weeks. The US dollar index (DXY) – a measure of the greenback’s strength compared to other major currencies, just ended the final trading week of 2023 at 101.38 – down about 2% for the whole year. year.

Falling interest rates are often seen as a headwind for the dollar. Although strategists have predicted the dollar will weaken in 2024, a faster pace of interest rate cuts by the Fed could accelerate the currency’s decline.

While Fed Chairman Jerome Powell is sending relatively dovish signals, the European Central Bank (ECB) and the Bank of England (BOE) are quite cautious when saying they can maintain interest rates. productivity stays high for longer periods of time. This further makes the market believe that the Fed will take the lead in loosening monetary policy in 2024.

If the market receives no other contrary signals, the US dollar will remain under pressure. Societe Generale believes the US dollar index could fall from current levels to below 100, or below 97.

A Reuters poll of analysts also indicated that the US dollar will weaken next year.

According to the basic scenario outlined by UBS Wealth Management, slowing US economic growth, cooling inflation and expectations of lower interest rates will support the stock and bond markets. Regarding the EUR/USD pair, UBS predicts the exchange rate will be at 1.12.

Commerzbank Germany’s forecast also includes a peak of 1.12. Analysts expect the euro to gain temporarily against the dollar before weakening. They predict the exchange rate will increase to 1.12 in June 2024, then decrease to 1.08 in March 2025.

Meanwhile, Nomura has predicted that sterling will rise to $1.35 by the end of 2025. “We believe the trend towards a weaker dollar will become clearer and this will help sterling The UK appreciated against the US dollar,” the bank’s economists said in early December.

On the other hand, Goldman Sachs strategists believe that although the dollar’s outlook may worsen in 2024, a strong and stable US economy will limit the currency’s decline. . According to Goldman Sachs, the dollar is still overvalued and investors are still leaning towards this currency.

That should help the greenback remain “strong over the long term” and any decline would be negligible. The US economy is still strong, and may not need an interest rate cut of more than 1.5 percentage points in 2024 to support growth.

Meanwhile, economists from Fidelity International, JPMorgan and HSBC also do not rule out a scenario in which other regulators, such as the ECB and BOE, may surpass the Fed to take the lead in easing.

At policy meetings last month, policymakers at the ECB and BOE did not signal any interest rate cuts in the near future. However, investors forecast that the ECB will reduce interest rates by a total of 1.61 percentage points in 2024, and may conduct the first cut in April. BOE is also forecast to cut interest rates by 1 .48 percentage points in 2024.

Brad Bechtel, head of global foreign exchange at Jefferies Bank in New York, said that the ECB and BOE will eventually have to reduce interest rates sooner than expected because of growth in the Eurozone. and the UK is facing many difficulties while inflation is cooling down quite quickly.

“If all three major central banks reduce interest rates, it will be very unlikely that the dollar will weaken significantly,” said Bechtel.

Danske Bank, Westpac and HSBC also believe that by the end of 2024 the dollar will strengthen against the euro and pound. ABN Amro’s forecast for the end of next year suggests the EUR/USD will be at 1.05 while the Economic Forecasting Agency predicts the rate will be at 1.023.

2024 will be a positive year for the Japanese yen

The Japanese Yen is one of the worst performing currencies in the past few years. The currency has fallen about 20% against the US dollar since the end of 2021, in the context that the Bank of Japan (BOJ) continues to maintain an ultra-loose monetary policy, while other central banks Promote increased interest rates to fight inflation. Higher interest rates outside Japan have caused the currency to steadily decline in value.

However, the situation is expected to change significantly in 2024, when inflation in Japan has gradually increased above the BOJ’s 2% target. Statistics show that the core inflation rate in November increased by 2.5% over the same period last year.

Currently, the BOJ is still cautious, not ready to raise interest rates too quickly for fear of affecting the economy. However, investors believe that tightening monetary policy will soon be implemented, once the BOJ assesses that inflation has been sustainably maintained above the target level of 2%.

Last year, the BOJ made some adjustments to its “yield curve control” policy, seeking to keep long-term bond yields low. The yen has increased about 7% against the US dollar since mid-November, partly reflecting investors’ expectations that the BOJ will abandon its negative interest rate policy in 2024.

The biggest support for the yen in the new year will likely come from the Fed, as the central bank cuts interest rates. The yield spread between 10-year government bonds in Japan and the US has narrowed by nearly 1 percentage point in the past two months, as US bond yields fell sharply, helping the yen rise by about 4.2 % against US dollar in December.

Japan Times quoted the forecasts of eight famous market analysts, saying that the USD/JPY exchange rate could fall to 1 dollar for 130 yen by 2024 in the context of monetary policies in Japan and the US having many changes. change.

The Chinese Yuan is expected to recover

A Bloomberg survey shows that in 2024, China’s yuan will strengthen for the first time in three years, as interest rate differentials narrow, making it easier for capital to flow abroad.

Analysts predict that the USD/CNY exchange rate may stop at 7 by the end of this year, in the context of the interest rate gap between the US and China gradually narrowing.

Mr. Ken Cheung, Head of Asia FX Strategy at Mizuho Bank Ltd. in Hong Kong (China), said: “The interest rate cutting cycle of major central banks expected to take place next year will help narrow the US-China interest rate gap and ease capital flow pressure.” flows out”.

“However, foreign investors are likely to remain cautious about investments in China due to the ongoing turmoil in the real estate market,” Mr. Cheung wrote in his 2024 outlook report. , the weak recovery of the world’s second largest economy and China-US geopolitical tensions.”

Mizuho expects that the USD/CNY exchange rate at the end of the year may stop at 6.95 – meaning the yuan will increase about 2% compared to the current level. Previously, the yuan had weakened about 10% against the US dollar since the end of 2021, and was one of the worst-performing emerging Asian currencies during this period.

Investor confidence in the currency has been further eroded, due to the crisis in the real estate market and weaker-than-expected consumer spending. These factors have become headwinds for the economy and pushed the People’s Bank of China (PBoC) to maintain looser monetary policies than other central banks globally.

Some positives for the yuan have emerged in recent months, mainly the growing expectation that the Fed could begin cutting interest rates as soon as the first quarter of 2024. According to the country’s foreign exchange regulator, money flows into the Chinese market appear to be improving as global investors bought a net $33 billion in Chinese bonds last month, the second highest in recent years. history.

Foreign investors have also returned to Chinese stocks this week. The wave of domestic stock buying last Friday marked the third consecutive net buying session by foreign investors. The net inflow of $1.9 billion recorded on Thursday was also the largest since late July.

However, according to a Bloomberg survey, the next few months are likely to bring challenges for the yuan as favorable seasonal factors often boost the currency such as exporter purchases ahead Lunar New Year will likely be slower than previous years.