The new year has started with the US Dollar (USD) recovering somewhat from its late 2023 sell-off. Economists at Scotiabank analyze Greenback’s outlook.
Narrowing growth and interest rate differentials will combine as a headwind for the USD in 2024
Regardless of the USD’s strong start to the year, we still expect it to soften over the balance of 2024 versus the core majors.
We anticipate the Fed will start relaxing its policy stance in Q3 2024 and we now expect fewer rate cuts (100 bps in total versus 150 bps in our last forecast) this year.
Some (modest) narrowing growth and interest rate differentials will combine as a headwind for the USD in 2024.
In real effective terms, the USD has appreciated significantly (around 28%) over the past ten years. Scope for additional USD gains may be limited in the medium to longer run and its elevated valuation leaves it prone to a correction, particularly as structural headwinds (the US fiscal imbalance) continue to strengthen.