By Saqib Iqbal Ahmed

NEW YORK (Reuters) -The Federal Reserve’s dovish December pivot has boosted the case for the weakening greenback to maintain falling into 2024, although power within the U.S. financial system may restrict the dollar’s decline.

After hovering to a two-decade excessive on the again of the Fed’s charge hikes in 2022, the U.S. foreign money has been largely range-bound this yr on the again of resilient U.S. development and the central financial institution’s vow to maintain borrowing prices elevated.

The greenback was on monitor for a 2% loss this yr towards a basket of its friends, its first yearly decline since 2020.

The December Fed assembly marked an surprising shift, after Chairman Jerome Powell stated the historic financial coverage tightening that introduced charges to their highest stage in a long time was probably over, due to cooling inflation. Policymakers now challenge 75 foundation factors of cuts subsequent yr.

Falling charges are typically seen as a headwind for the greenback, making property within the U.S. foreign money much less engaging to yield-seeking traders. Although strategists had anticipated the greenback to weaken subsequent yr, a quicker tempo of charge cuts may speed up the foreign money’s decline.

Nonetheless, betting on a weaker greenback has been a dangerous enterprise lately, and a few traders are cautious of leaping the gun. A U.S. financial system that continues to outperform its friends may very well be one issue presenting an impediment for bearish traders.

The Fed’s aggressive financial coverage tightening, together with post-pandemic insurance policies to spice up U.S. development, “fueled the notion of American exceptionalism and delivered probably the most highly effective greenback rally for the reason that Eighties,” stated Package Juckes, chief FX strategist at Societe Generale (OTC:).

With the Fed set to ease coverage, “a few of these positive aspects must be reversed,” he stated.

FADING STRENGTH?

Getting the greenback proper is essential for analysts and traders, given the U.S. foreign money’s central function in international finance.

For the U.S., a weak greenback would make exports extra aggressive overseas and enhance the earnings of multinationals by making it cheaper to transform their international earnings into {dollars}. A couple of quarter of corporations generate greater than 50% of revenues exterior the U.S., based on FactSet information.

An early December Reuters ballot of 71 FX strategists confirmed expectations for the greenback to fall towards G10 currencies in 2024, with the larger a part of its decline coming within the second half of the yr.

Whether or not they’re proper could come all the way down to how the U.S. financial system performs in comparison with its international friends subsequent yr and the tempo at which central banks regulate financial coverage.

To this point, it has been an uneven image. Within the eurozone, a downturn in enterprise exercise deepened in December, based on carefully watched surveys that present the bloc’s financial system is nearly actually in recession. Nonetheless, the European Central Financial institution has pushed again towards charge lower expectations because it stays centered on combating inflation. The euro is up greater than 3% towards the greenback this yr.

The “development slowdown is extra entrenched in different economies,” stated Thanos Bardas, senior portfolio supervisor at Neuberger Berman, who’s bullish on the greenback over the subsequent 12 months. “For the U.S. it is going to take some time for development to decelerate.”

Others, nonetheless, see areas of power, notably in Asian economies. Paresh Upadhyaya, director of fastened revenue and foreign money technique at Amundi US, says he believes the market is “method too pessimistic” on the outlook for development in China and India. Accelerating development may enhance the nations’ urge for food for uncooked supplies, benefiting commodity currencies such because the Australian, New Zealand and Canadian {dollars}.

China will step up coverage changes to help an financial restoration in 2024, based on state media studies.

Jack McIntyre, portfolio supervisor at Brandywine International in Philadelphia, is relying on U.S. development slowing whereas Chinese language development picks up. He has been promoting the greenback to fund the acquisition of Asian currencies.

“The greenback’s bull run may be very mature,” he stated.

The Worldwide Financial Fund in October forecast the U.S. financial system would develop by 1.5% in 2024, in comparison with 1.2% for the eurozone and 4.2% for China.

After all, the greenback’s trajectory may rely on how a lot Fed easing and falling inflation is already mirrored in its value. Futures tied to the Fed’s coverage charge present traders factoring in additional than 150 foundation factors in cuts subsequent yr, about twice as a lot as Fed policymakers have penciled in.

“If inflation stalls and doesn’t proceed to say no that is the place the case grows for the Fed to carry off,” stated Matt Weller, head of market analysis at StoneX. “That will surely be a bullish improvement for the greenback.”