The US dollar (USD) fell further on Friday after rising overnight due to the hawkish remarks of Federal Reserve Chairman Jerome Powell, which surprised traders. The Fed chairman noted that policymakers are not afraid to increase interest rates further if necessary, which contradicts the market consensus that the Fed The rate hike has been finished and cuts will be in handy soon. The surprise was even greater, with Atlanta Federal Reserve Bank President Raphael Bostic and Richmond Federal Reserve Bank President Thomas Parkin making very pessimistic statements. On the economic data front, traders will need to evaluate Powell’s words before heading to the weekend. With only one Fed speaker yet to come, Friday’s pivot point will be the Michigan Preliminary Consumer Confidence Index and consumer inflation expectations. Should these prices fall further, we could see the US Dollar Index (DXY) recoup its gains made late Thursday evening and close this week flat or with a small profit..
The US dollar received US support from public comments from Fed Chairman Powell. However, support began to fade very quickly in Friday’s gaming session. King Dollar, which DXY tracks, seems unable to come back, which means there may be more of an indicator from the underside.
The DXY was moving for support near 105.00, and managed to bounce ahead of the index earlier this week. Any of the traumatic events in global disciplines can turn into diversification and favor the dynamic stimulus of the US dollar. The replenishment will bounce back to 105.85 logically, which is the level of the central credit score from March 2023. A breakout above that means a return to around 107.00 and the recent new highs there.
The impact of rising bond yields on financial markets and major currencies
U.S. financial markets saw a notable shift yesterday, with a significant increase in Treasury yields after a weak auction of 20- and 30-year notes. The yield on US 30-year bonds rose by 22 basis points, while yields on 20-year and 10-year bonds also saw significant jumps, with the latter rising above 4.60%. The move in the bond market came on the heels of hawkish remarks made by Federal Reserve Chairman Jerome Powell at an IMF event, where he signaled the possibility of raising interest rates again. As a result, the yield on the two-year US bond exceeded the threshold of 5%.
This rise in yields has had a ripple effect on other financial markets. On Thursday, the S&P 500 andNasdaq Composite closed down about 0.80%, as investors reacted to the prospect of an inverted yield curve, which is often seen as a precursor to the economic downturn.
Despite these market movements and the increased cost of borrowing implied by higher yields, Goldman Sachs maintains a relatively optimistic outlook for the US economy. The investment bank estimates that there is only a 15% chance of a recession next year.
Today, the impact of rising Treasury yields has been felt on currency exchanges. The U.S. dollar gained strength against other major currencies, with the euro falling below 1.07 against the dollar amid political and economic challenges within the eurozone. Although the ECB has maintained high interest rates, doubts about their effectiveness remain in the market.
Sterling also fell to 1.22 against the dollar after Bank of England comments suggested it was too early to consider cutting interest rates. The medium-term outlook for GBPUSD is neutral to bearish, weighed down by strong dollar demand.
Currency movements: Euro Rises, Australian Dollar Faces Challenges
Today, the currency market is seeing the euro gain some momentum, especially against the underperforming Japanese yen alongside the Australian dollar. Despite the RBA’s hint at a possible rate hike, the Australian dollar is facing difficulties, not only against major currencies but also against their commodity-linked counterparts. The British pound is also lagging behind even though the UK’s GDP figures are slightly higher than expected. Dollar shows signs of holding but unable to garner strong momentum to build heavily on this week’s recovery efforts.
In commodity markets, gold is slipping below the 1950 level again. WTI is in recession, hovering around 76 marks, after a notable decline earlier in the week. While 10-year US Treasury yields showed an impressive rebound yesterday, they were unable to maintain the upward trajectory, suggesting caution among bond investors.
Given the uncertain background as we approach 2024, we believe the US dollar will remain a safe place for at least the next few months.
There is a more optimistic observation in the cryptocurrency market, where Bitcoin and Ethereum are showing significant bullish momentum. Bitcoin succeeded in breaking the 37K mark, while Ethereum surpassed the 2000 level, indicating intensifying investor interest in digital assets.
In Asia, despite concerns about Japan’s possible intervention to support its currency, USDJPY rose above 151. Oil prices are showing temporary signs of recovery after seeing a big sell-off, finding some support at $75 a barrel. Future oil price trends could be shaped by China’s policy on Iranian oil imports and record high production levels from U.S. shale producers.
Forecast for the US dollar in 2024: temporary stability and then turned into expected weakness
Given the uncertain background as we approach 2024, we believe the US dollar will remain a safe place for at least the next few months.
We expect the US dollar to appreciate further during the first quarter of 2024 at least and possibly longer. We expect the strength of the US dollar to be particularly noticeable against the euro and the pound, where a sharp slowdown in growth along with central banks that are likely to have reached the end of their tightening cycles are likely to weigh on these two currencies. Some Latin American currencies may also come under pressure.
We expect the US dollar’s strength trend to eventually wane and turn into a weaker US dollar later in 2024, as our view is still heading towards a moderate recession in the US, and the Fed to ease monetary policy more than expected by financial market participants. However, the outlook shifts towards less weakness for the US dollar and less strength for the foreign currency, with risks tilted towards a softer downside for the US economy and a more gradual easing of the Federal Reserve.
We still believe that the Japanese yen could outperform the G10 currencies in 2024 as central banks eventually turn to monetary easing.
There is a more optimistic observation in the cryptocurrency market, where Bitcoin and Ethereum are showing significant bullish momentum. Bitcoin succeeded in breaking the 37K mark, while Ethereum surpassed the 2000 level, indicating intensifying investor interest in digital assets.
Risk-sensitive currencies and commodities in Australia, Canada and New Zealand may see moderate gains during 2024, while the pound sterling and the euro may continue to weaken.
