Will the US dollar decline in 2024?
The US dollar has suffered a gradual decline over recent decades. In the face of a rising China and a more belligerent geopolitical settlement, the amount of US currency held by central banks as a reserve currency has fallen sharply. But while the dollar might not still enjoy the same hegemony of its 1990s heydays, it continues to represent the strongest reserve currency, even in its weakened state. And the decline in the dollar might not be one steep fall – there will be peaks, troughs, and perhaps even a reversal in fortune. Whatever its ultimate fate, much rests on the value of the dollar, which is why so many analysts and investors want to know: will the dollar decline in 2024?
Will the Federal Reserve lower interest rates?
According to an analysis by Reuters, a recent meeting of the Federal Reserve ‘boosts the case’ for the declining dollar to slump into 2024. The chair of the Fed, Jerome Powell, signalled that the previous period of high interest rates would likely come to an end. It came weeks after Powell said falling inflation gave the green light to cut the cost of borrowing.
While this could spell good news for borrowers, it might mean an acceleration in the dollar’s decline as investors looking for high yields drop the currency in favour of a rival. Many analysts agree this could be the likely outcome, as one poll of 71 FX strategists indicates.
However, according to Bloomberg, several investment firms are betting on the dollar to remain resilient throughout 2024, following a strong two-year stint since 2022. According to macro strategist Isabella Rosenberg, an expectation that the US economy will outperform a cautious forecast would mean a dollar in high demand. Ms Rosenburg argued there was good reason to think this might be the case, given the US economy grew at 2.4% in 2023, exceeding a ‘consensus forecast’ of just 0.4%. She went on to say that against a backdrop of slowing growth in Europe and China, it was ‘not surprising’ to see cross-border funds flowing to the US.
Can the BRICS challenge the US?
Writing for market data website Barchart, Andrew Hecht argued the value of the dollar in 2024 would be tied to emerging geopolitical developments, including the growth of the BRICS group and a renewed alliance between Russia and China. Commenting, he said:
“With wars in Ukraine and the Middle East, a divisive U.S. Presidential election, and division among the world’s powers, 2024 could be a very volatile year. Moreover, it is an opportunity for Brazil, Russia, India, China, and their allies to take power from the United States. The international currency market is the purse strings, which have far-reaching political and economic consequences.”
At a recent meeting of BRICS countries, Vladimir Putin claimed that de-dollarisation was gaining pace. And while power is shifting away from the US, the dollar being supplanted is by no means either inevitable or foreseeable in the medium to long term. Countries within the group are working to make more use of their local currencies, with around 80 per cent of trade between Russia and China now taking place in Russian Rubles or Chinese Yuan. But this poses issues around convertibility and the viability of these monies as reserve currencies, given the varied central bank policies of each member group.
For these reasons, experts maintain the dollar will remain king, even in the face of emerging challenges. Speaking to Al Jazeera, analyst Chris Weafer said any serious challenge to the dollar would be decades away, arguing that even if the BRICS created a common currency – an unlikely prospect – it would “work similarly to the Euro” that is to say, pose no kind of threat at all.
Will the Chinese Yuan overtake the US dollar?
There is growing consensus that the Chinese Yuan will gain strength in 2024. Bloomberg reported that a median forecast by 17 traders and analysts indicates the currency will appreciate for the first time in three years.
It is a view shared by Nigel Green, CEO of the deVere Group, who predicted the momentum in cross-border use of the Yuan will continue, seeing it emerge ‘as a frontrunner in the shifting landscape of international finance.’ Writing for the Asia Times, he said:
“One of the primary catalysts behind the accelerated internationalisation of the yuan is the shifting geopolitical landscape. In recent years, geopolitical tensions have intensified, prompting countries and businesses to diversify their currency holdings and transactions…
“Investors and businesses are increasingly attracted to the opportunities presented by the Chinese market, further fuelling the use of the yuan in global payments. There’s also the proactive approach to digital currency innovation, which plays a role in the increased cross-border use of the yuan.
“The development and piloting of the digital yuan, the country’s central bank digital currency (CBDC), have garnered international attention…
“Businesses, investors, and nations around the world are adapting to this evolution, recognising the opportunities presented by the growing influence of the renminbi in cross-border transactions.”
Previous analysis by the deVere Group examined the importance of the Renminbi Liquidity Agreement, which helped to secure a boost to the quantity of Yuan held in the foreign reserves of the five nations signatory to the agreement. It is one of several measures introduced by China to give ballast to its currency’s strength and international reputation.
Do experts think the dollar will decline?
There is no apparent consensus among analysts. While some investment banks are betting on a strong dollar throughout the year, others are just as convinced the opposite will be true. At Amundi, the view is of a declining dollar against a rising Euro. In their 2024 Global Investment Outlook, they predicted:
“Quality bonds (sovereign or corporate) are the favoured asset class entering 2024. Gradually add duration and focus on investment grade credit, EM debt in hard currencies and Euro high yield short-term. Add more EM local currency debt after the Fed starts cutting rates and the US dollar weakens. US high yield may be pressured by high refinancing costs in H1 and could come back when financial conditions ease in H2.”
It is a view shared by investment strategy director Rob Haworth, who warned if the Fed ‘holds the line’ on hiking interest rates, the dollar could become a less attractive prospect to traders: “That could harm demand for the dollar, resulting in weaker dollar performance versus the euro and other currencies.”
Will the dollar stay strong in 2024?
The fate of the US dollar in 2024 is tied to a complex interplay of economic, geopolitical, and monetary factors. As hinted by Chair Jerome Powell, the Federal Reserve’s potential decision to lower interest rates could contribute to a continued decline in the dollar’s value, particularly if investors seek higher-yielding alternatives. On the contrary, some experts, like macro strategist Isabella Rosenberg, argue that a strong performance by the US economy may support the dollar, given its recent growth outpacing forecasts.
Geopolitical shifts, especially the rise of the BRICS group and the increasing use of the Chinese Yuan in international transactions, pose challenges to the dollar’s dominance. However, analysts say any serious challenge is still decades away. The ongoing tensions in Ukraine and the Middle East, a divisive US Presidential election, and global economic uncertainties contribute to the overall volatility, making the dollar price challenging to forecast. Ultimately, whether the US dollar will decline in 2024 depends on evolving global dynamics and policy decisions. The complexity of these factors underscores the need for investors to remain vigilant and adapt their strategies based on the dynamic landscape of international finance.