Investors who gambled the dollar would collapse under a torrent of interest rate cuts have been disappointed by a stronger-than-expected U.S. economy.
The dollar index (.DXY), opens new tab, is up 2.4% year-to-date. Commodity Futures Trading Commission statistics revealed positive dollar futures net bets last month for the first time since late November.
A strong U.S. economy has kept the Fed from easing monetary policy too rapidly and risking an inflationary resurgence, keeping the dollar strong. US GDP rose 3.2% annually in the fourth quarter. In contrast, the eurozone's economy stagnated last year, China's property crisis deepened, and Japan suddenly entered recession in 2023.
With the U.S. economy still strong, "there is no significant evidence Europe and China are picking up," said Macquarie global FX and rates analyst Thierry Wizman, who has turned more neutral on the dollar since last year.
He remarked, "That's the reason people have had this change of heart" on the dollar. Investors will watch Fed Chairman Jerome Powell speak before legislators on Wednesday and Thursday and wait for U.S. employment data at the end of the week, testing the dollar. The dollar may rise if the Fed maintains its "higher for longer" rate cut message if the U.S. economy remains robust.
Futures related to the Fed's policy rate showed investors pricing in 85 basis points of rate cuts for 2024, down from 150 in early January.
Ugo Lancioni, head of currency at Neuberger Berman, is a dollar bull who expects the greenback to rise due to U.S. outperformance despite its high price. "Our call right now is purely a relative growth type of call," stated. Investors must correctly predict the dollar's trajectory due to its centrality in global finance.
A high currency makes it more expensive for U.S. companies to convert international profits into dollars and makes exporters' products less competitive abroad. FactSet found that 25% of S&P 500 firms generate over 50% of revenues abroad.
Follow for more updates