The dollar will remain strong in 2024

The resurgence of the American dollar exasperates central bankers and governments worldwide, forcing them to act to relieve pressure on their currency. From Tokyo to Istanbul, policymakers are intervening to defend exchange rates, both in words and deeds, as a resilient American economy maintains a strong dollar by defying expectations of US interest rate cuts.

The dollar has gained against virtually all its major peers in 2024, defying predictions by most analysts who anticipated a dollar decline at the beginning of the year.
These intensified efforts recall 2022 when Swiss and Canadian officials lamented the weakening of their exchange rates amid rising inflation and a strong dollar that ravaged emerging economies, contributing to Sri Lanka’s historic default.
Today, countries burdened by external debt remain in danger, with the Maldives, Ecuador, and Bolivia particularly vulnerable if the dollar’s strength persists.

The American dollar continues to exert pressure on other central banks. Given the current global environment in which central banks seek to end their monetary tightening cycles, there is no safe way out of the dollar’s continued dominance.
Just a few months ago, a recession in the United States seemed almost inevitable. Instead, data shows that the country benefits from a tight labour market, optimistic consumer sentiment, and government subsidies to the manufacturing sector, prompting investors to reassess their expectations for Federal Reserve interest rate cuts quickly.
Investors now anticipate cuts of less than three-quarters of a point in 2024, down from bets on a cut of more than 150 basis points earlier in the year. This helps to strengthen the US currency, prompting central banks worldwide to play a defensive role.

The BOJ has announced ‘bold action’ to support the yen as the currency is at its lowest level in 34 years. Indonesia has intervened repeatedly in interbank, forward, and bond markets to bolster its rupee. And with the Chinese yuan at the bottom of its authorized trading band against the dollar, investors expect more aggressive measures. The yuan has weighed on other Asian currencies, notably that of India. Other countries are turning to monetary policy to support their currency. Turkey unexpectedly raised its interest rates last month, while Swedish officials said a weaker crown could delay its first easing measure.

Exchange rates are significant because currency depreciation increases the cost of imported goods, fueling inflation. At the same time, money is more likely to flee from a country with a weak currency in search of higher returns elsewhere. Massive capital flight could hit the emerging world if a strong dollar persists.

The irony is that unilateral intervention in foreign exchange markets, where $7.5 trillion is traded daily, has become impossible. Even though markets still expect the Fed to ease its policy this year, only some are convinced it will relieve currency markets. Central banks are poised to embark on their most extensive synchronized rate-cutting cycle since 2008, and such a scenario bodes well for the dollar, as the US benchmark interest rate is expected to remain one of the highest among major developed economies this year.

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