The dollar is putting the currency world on the wrong track for a while

2024 has started with fireworks on currency markets. The dollar took off when the Federal Reserve minutes showed that a rapid decline in US interest rates is not a foregone conclusion.

The dollar started a significant slide in the last quarter of last year. For example, the currency lost more than 5% against the euro. The dollar weakness was caused by a steady decline in US inflation. Remember when twelve months ago the newspapers were full of reports that life was getting more and more expensive? This is no longer the case in the United States. Over the course of 2023, this inflation has more than halved from 6,4% in January to 3,1% in November. There is a good chance that next Thursday, when the inflation figures for December are published, it will appear that inflation does not pose a threat to the American economy for the time being. In recent months, this has already been a reason for many parties to prepare for an interest rate cut by the Federal Reserve.

Politically neutral
The idea is that the series of interest rate increases over the past year and a half have done their job. Inflation appears to be moving gradually towards the 2% target level, allowing the central bank to accelerate its rate cuts. If the Federal Reserve waits too long to do so, the bank runs the risk of becoming part of a political game. The American presidential elections will take place on Thursday, November 5. A significant interest rate cut just before the polls could be interpreted as disguised support for incumbent President Joe Biden. At the turn of the year, traders were therefore pricing in a chance of around 15% that the Federal Reserve would immediately cut interest rates at its first meeting in January.

The danger of a strong economy
That chance is now less than 5%. In recent days, some figures have emerged that indicate that the American economy is doing very well. For example, on Friday it became clear that the number of jobs increased by no less than 216.000 in December. That is much more than the 170.000 jobs economists had expected. The average hourly wage also rose faster than expected at 4,1%. A strong economy may be a reason to take a pause with interest rates. If Americans continue to happily spend money, there is a risk that inflation will flare up again. And that would be a lot more painful for the Federal Reserve than being accused of political interference.

wild ride
The recently published minutes of the central bank showed that an interest rate cut in the short term is not a foregone conclusion. The negative sentiment surrounding the dollar will have completely disappeared in 2024 due to the changing news flow. But the US currency is not yet ready to catch up. Because disappointing figures for the service sector in the United States quickly put an end to a cautious start to a rally. If the first trading days of the new year are any indication, the dollar is in for another wild ride in the coming months.

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.

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