Updated March 5th, 2024 at 11:40 IST

US economic strength shores up dollar, defying bearish expectations

Despite anticipations of interest rate cuts that have yet to materialise, the dollar index has surged 2.4% year-to-date (YTD).

Reported by: Business Desk
Dollar | Image:Pixabay
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Dollar in focus: The dollar has defied expectations of a weakening trend, buoyed by a robust US economy that has outperformed its global counterparts. 

Despite anticipations of interest rate cuts that have yet to materialise, the dollar index, which gauges the currency against a basket of peers, has surged by 2.4 per cent year-to-date. 

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Futures markets indicate a shift in sentiment, with net bets on the dollar turning positive for the first time since late November, according to Commodity Futures Trading Commission data.

Driving the dollar's resilience is the sturdy US economic performance, which has prompted caution from the Federal Reserve regarding swift monetary policy easing and the potential for an inflationary rebound. 

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In contrast to the US, the eurozone experienced economic stagnation last year, China grapples with a deepening property crisis, and Japan unexpectedly slipped into recession by the end of 2023.

Thierry Wizman, global FX and rates strategist at Macquarie, notes the lack of crucial evidence indicating economic recovery in Europe and China, leading to a shift in sentiment towards the dollar. Wizman, who previously held a bearish outlook on the dollar, now adopts a more neutral stance.

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This week presents pivotal events that could influence the dollar's trajectory, including Federal Reserve Chairman Jerome Powell's testimony before lawmakers and the release of US employment data. 

The Fed's commitment to its "higher for longer" messaging on rate cuts or continued strength in the US economy may bolster the dollar's rally.

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While investors previously anticipated over 150 basis points of rate cuts for 2024, the current expectation stands at around 85 basis points, according to futures tied to the Fed's policy rate. 

Despite the dollar's strength, some analysts maintain a bearish outlook, although the currency's persistent resilience challenges their projections.

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Paul Mielczarski, head of macro strategy at Brandywine Global, views the recent dollar rebound as more of a tactical rally than a shift in the underlying trend. 

However, others anticipate further dollar strength, particularly if former US President Donald Trump gains momentum in the presidential reelection race.

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Analysts at Capital Economics suggest that Trump's proposed tariff increases could prompt the Fed to adopt a tightening bias on monetary policy, potentially sparking a wider trade war and increasing safe-haven demand for the dollar. 

While investors remain cautious, scepticism persists regarding renewed bearish bets against the greenback.

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(With Reuters Inputs)

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Published March 5th, 2024 at 11:40 IST