This is how the dollar will be the surprise of 2024

This week the Federal Reserve will make a new interest rate decision. The chance of a new interest rate increase is nil, but a first cut may take a long time. This is not yet reflected in the current dollar rate.

Moving is always a hassle. In the case of moving my column from Thursday to Tuesday (starting next week), fortunately no moving boxes are involved. But it takes some getting used to the fact that I can look ahead to the interest rate decisions that the American central bank always makes on a Wednesday, instead of having to respond to them the next day. And as every holidaymaker knows, anticipation is often more fun than reminiscing about travel memories. There is little anticipation to be had about the interest rate decision that will be released early in the evening of November 1. Because things must be very strange if interest rates start moving.

Interest rate drop in 2024? Not so fast!
According to a CME Fedwatch poll, 98% of stock market traders expect this to slow down the Federal Reserve. In the longer term, the big surprise will probably not come from what the US central bank does, but rather from what it fails to do. The financial world seems firmly convinced that interest rates will fall again in the course of 2024. No fewer than 96% of economists expect interest rates to be lower in fourteen months than they are now. However, the question is whether the Federal Reserve will have room to lower interest rates. The significant drop in inflation in the first half of the year will not continue. In September, US inflation stood at 3,7%, just like in August.

Tailwind for the dollar
The tightness on the labor market continues and the oil price has risen by almost 20% since the end of June. More expensive energy translates into higher prices in many ways. Unfortunately, the Federal Reserve will not release a so-called dot plot tomorrow. This is a table that shows how Fed officials expect interest rates to move in the future. At the September meeting, the average estimate for the end of 2024 was still 5,1%. If this does not change in the next dot plot in December, many parties will have to adjust their interest rate forecast for next year. And higher-than-expected interest rates usually translate into a stronger currency. The dollar could also get the wind at its back in many other respects in 2024.

Myth busted
The myth that the American currency is losing ground to the euro in terms of image and trade share in the currency world can be dispelled. The share of the euro in international transactions recently reached 23%, while at the beginning of 2023 it was still 38%. In addition, European countries have less room to boost the economy through looser fiscal policies than the United States. The economic growth rate is already somewhat lower in Europe due to the high dependence on imported energy, which has become a lot more expensive due to the Ukraine war. And finally, the dollar is still an important refuge in uncertain times. Although 2024 is still two months away, the American currency is already a favorite to become one of the surprises of the new year.

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

© DCA Market Intelligence. This market information is subject to copyright. It is not permitted to reproduce, distribute, disseminate or make the content available to third parties for compensation, in any form, without the express written permission of DCA Market Intelligence.