Dollar bears will be disappointed in 2024

Hello, I’m Javier Corominas, Director of Global Macro Strategy here at Oxford Economics. There are tentative signs that our strong dollar view, which we’ve held since the spring, may be nearing exhaustion. Indeed, the recent pullback in yields, together with an increase in risk appetite after a very turbulent October, has meant that the dollar has given back some of the accrued gains against major crosses and selected EM currencies this year.

Is this the end of the dollar rally? Well, we think such calls are still premature. When it comes to EURUSD. We expect a terminal ECB policy rate at least 50 basis points below market expectations with the opposite in the case of the Fed. This monetary policy divergence versus market expectations means the greenback should hold on to this year’s gains and will curtail any potential upside in the EURUSD beyond 1.10.

But differentiation, as always, will be key. We think the stars are aligning for a potential yen outperformance versus the dollar, but also against typical currencies such as the Australian dollar and the Canadian dollar. The yen is properly a cheap hedge against a more severe downturn scenario next year. In the final analysis, BOJ has to choose between yields or currencies.

So far it has let the yen take the slack, but this will not always be so. In fact, we think the catalyst for yen strength next year will be the ongoing unraveling of YCC policy and lift off from negative rates, which we expect in April at the latest. Overall, therefore, we think the dollar will remain strong, but still 2024 will be a harder year for the dollar to outperform with key risks, including valuations, if anything, tilted to the downside.

We will be monitoring any potential data disappointments and the impact on potential lower US yields with very close attention.