2023 was supposed to be the year of the dollar demise. Instead, things did not pan out that way as the greenback proved to be rather resilient. And so the narrative has been constantly kicked down the road for many months now but is yesterday the tell that we have finally gone past the summit on the dollar's journey?
The market thinking now is that the Fed is done with rate hikes and that is helping to dispel some deep-seated fear that we could see interest rates hit 6%. The talk now instead is about rate cuts and traders are seeing that come as soon as June next year. It's a rather straightforward thinking that inflation is going to progressively return to the 2% mark while the US economy achieves a soft landing and perhaps even avoid a technical recession altogether.
That's the hope and that is what markets are pricing in at the moment.
And if things do play out that way, perhaps we have already seen the dollar go past the apex and is set to fall further going into next year. That being said, this is the same kind of naive thinking that caught traders off-guard about the supposedly imminent demise of the dollar all through this year.
Sure, we're starting to see the dollar finally crack lower significantly but it is still trading up 14.7% higher against the yen this year, 1.1% up against the loonie, 4.3% up against the aussie, and 4.8% up against the kiwi. It is only European currencies that have outperformed the dollar in any way and a large part of that is thanks to gains in the last two weeks. If you put that aside, the dollar has held up rather well against all the calls of it set to fall apart since the end of last year already.
So, is there a chance that traders might get blindsided by the greenback again?
I would say the odds of that is lower this time around but the current market positioning is a dangerous one that could result in squeezes.
The dollar might not be in a good spot technically at the moment (as outlined earlier via EUR/USD, AUD/USD, and GBP/USD) and could be set for a further decline in the near-term.
But in the overall picture, the US economy continues to outshine its peers and the Fed looks most likely to be in a stronger position to keep rates higher for longer than other major central banks. And when you throw in the fact that Treasury yields are likely to stay underpinned amid the waves of supply coming through, a reversal in the bond market may not be too forceful given a counter-force that will warrant selling pressures.
All of that are supportive factors for the dollar to some extent and depending on how the market focus shifts and what the data tells us, it will offer traders some clues on the degree of resilience that we might see in the greenback heading into next year.
To summarise, yes we might be past the summit already for the dollar's climb higher. However, to say that we will see a protracted and steep decline in the greenback next is to think that the market isn't going to throw you any curveballs along the way. And as we already have seen this year, that's not exactly how things work most of the time.