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- The dollar's bullish run is set to run its course in 2024, ING analysts wrote on Wednesday.
- As a recession kicks in next year, the Fed will cut interest rates by 150 basis points.
- This will lower US exceptionalism, and drive investors towards undervalued currencies.
The US dollar's impressive rally that has extended through the second half of this year should finally catch a break in 2024, ING analysts wrote in a Wednesday note.
"It feels like a wrestling match and the dollar will not roll over that easily," they said. "Yet our simple thesis is that tighter interest rates finally catch up with the US economy next year, growth registers a paltry 0.5% and the Fed, in line with its dual mandate to focus on inflation and maximum employment, cuts rates back into less restrictive territory."
Since around August, a powerful bull trend sent the greenback into upswing, and the currency registered a 4.9% quarter-on-quarter growth rate, annualized in the third quarter. Holding the dollar has become a no-brainer trade, ING said, as high US interest rates and elevated Treasury yields have acted as a magnet for capital inflows.
But a coming US recession will force the Federal Reserve to slash rates by 150 basis points in 2024's second quarter, the analysts predict, jump starting the "dollar's long goodbye."
Lower rates would not only dampen the attractiveness of US assets, but bring down yields on short-dated US Treasurys. This can often be a headwind for the greenback, while helping commodity currencies rise.
Within this trend, undervalued tenders will have the most to gain, such as the Australian dollar and Norwegian kroner. "Growth" currencies, which function similarly to growth stocks, will also benefit — the Swedish krona is one example, ING said.
"So bringing it all together we think 2024 will be a year in which currencies and the rest of the world can breathe after being dominated by the strong dollar trend for so long," Chris Turner, Global Head of Markets, said in an attached video.
However, the rally against the dollar won't be led by Eurozone currencies, however, as the region is headed for its own recession. This could cause the European Central Bank to cut its own rates, potentially before the Fed does.
Analysts also acknowledged that challenges do exist to this outlook, such as stubborn inflation, Middle Eastern geopolitical escalations, or the re-election of President Donald Trump, who has voiced plans for anti-China policy.
Meanwhile, others have laid out bullish dollar forecasts. This includes FxPro analyst Alex Kuptsikevich, who projected a multi-year rally following the recent US credit downgrade — previously, the greenback saw major gains when it was downgraded in 2011 by S&P, he said.