What will keep the US dollar strong this year

Although it is overvalued on many measures, we expect the US dollar to remain strong this year, based on three factors – relative economic strength, the investor appeal of the US stock market, and geopolitical risk.

The US economy has started the year on a strong note, setting up this year to be another good one for the greenback. 354, 000 jobs were added to the market in January. Core inflation was 3.9% y/y in January, above the anticipated 3.7%, convincing investors that interest rates will stay higher for longer. The 10-year Treasury yield has already risen 0.29 ppts in 2024 and the 2-year yield added 0.2 ppts on the back of activity and inflation data. Overall, in February, federal-funds futures’ investors revised down their expectations pricing of Fed rate cuts to 90 for the year, down from the 150 bps expected at the start of the year. We expect the Federal Funds rate to remain at 5.25–5.50% until at least June, when we expect the first 25 bps rate cut to be announced with three rate cuts projected for 2024 in total, in line with FOMC’s projections. This means interest rate differentials will continue being supportive for the dollar against many other currencies this year.

We have recently revised our outlook for the US economy, expecting economic activity to slow down in 2024 more modestly than we did before, and now expect to see 2.4% growth this year. A stronger economy normally leads to a stronger currency. In mid-February, the DXY index, which tracks the currency against six peers, rose to its highest level since mid-November 2023, reaching 104.97. The USD has advanced against the Euro since the beginning of the year and remains around 6% higher against the yen mainly due to continued ultra-loose monetary policy in Japan. While the Chinese New Year holiday boosted tourism revenues it failed to budge onshore yuan against the dollar.

Furthermore, a strong US technology sector continues to boost the stock market, attracting capital and providing additional support for the dollar. The S&P 500?hit a new record on 12 February 2024, climbing to 5,048 and surpassing its previous peak in January 2022. The rise in S&P 500 has mainly been driven by a handful of mega cap companies with strong cash positions. The equal-weighted S&P 500 index barely moved this year and remains below the all-time highs it reached in early 2021. However, expectations about the benefits of AI are likely to continue attracting foreign investment into the US, thereby supporting the US dollar.

Another dollar-positive factor is geopolitical risk, which remains elevated. A number of potential events are on investors’ radar – major cyber and terror attacks, US-China strategic competition, global technology decoupling, Russia-NATO conflict and Gulf tensions. In times of geopolitical uncertainty the US dollar tends to prosper, thereby attracting more demand as a safe-heaven currency. Moreover, elevated geopolitical tension contributes to protectionism. Markets are increasingly focused on the implementation of potential US tariffs that could follow the presidential election.

JP Morgan research calculated that a universal 10% tariff could boost the trade-weighted value of the dollar by 4–6%, impacting growth-sensitive currencies in a widening trade war that can expand beyond China to other trading blocks, such as the rest of Asia, Europe and Mexico. If this was to happen, it would have a strong impact on the US dollar.

We expect the USD will remain strong throughout the rest of the year riding on resilience of the US economy, Fed’s hawkish stance, booming stock market and underperformance of America’s peers, such as China and Europe.

For more information, see our latest FX monthly report here.

About the Author

Veronika Akhmadieva, Senior Economist

Veronika joined CRU’s Economics Team in September 2021 as an American Economist. She focuses on the economic analysis and forecasting for the North America region.