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Exploring the Resilient Dollar Amidst Economic Turbulence Exploring the Resilient Dollar Amidst Economic Turbulence

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By Saqib Iqbal Ahmed

New York Economy Defies Expectations

NEW YORK, March 5 (Reuters)A stronger-than-expected U.S. economy is buoying the dollar, frustrating investors who had bet the currency would wilt under a barrage of interest rate cuts that have yet to materialize.

The dollar index .DXY, which measures the buck against a basket of its peers, is up 2.4% year-to-date. Net bets on the dollar in futures markets swung positive last month for the first time since late November, Commodity Futures Trading Commission data showed.

Driving the U.S. currency’s stubborn strength is a robust U.S. economy that has made the Fed hesitant to ease monetary policy too quickly and risk an inflationary rebound.

Global Economic Disparities

U.S. gross domestic product grew at a 3.2% annualized rate in the fourth quarter. By contrast, the eurozone’s economy stagnated last year, China faces a deepening property crisis, and Japan unexpectedly slipped into recession at the end of 2023.

Forecasts and Market Dynamics

The dollar’s strength will be tested this week as investors brace for Fed Chairman Jerome Powell to testify before lawmakers on Wednesday and Thursday and await U.S. employment data at the end of the week. Signs that the Fed is sticking with its “higher for longer” messaging on rate cuts or that the U.S. economy continues to stay strong could support the dollar’s rally.

Investors are pricing in some 85 basis points of rate cuts for 2024, compared to more than 150 basis points they had factored in early January, futures tied to the Fed’s policy rate showed.

Expert Insights and Market Sentiments

Among the dollar bulls is Ugo Lancioni, head of currency at Neuberger Berman, who is betting on the greenback to continue rising thanks to U.S. outperformance even though he believes it has grown expensive relative to other currencies.

“Our call right now is purely a relative growth type of call,” he said.

Getting the dollar’s trajectory right is important for investors, given the currency’s central role in global finance.

A strong dollar could weigh on the outlook for U.S. multinationals as it makes it more expensive to convert their foreign profits into dollars, while also making exporters’ products less competitive abroad. About a quarter of S&P 500 companies generate more than 50% of revenues outside the U.S., FactSet data showed.

Impact on Central Banks and World Economies

Dollar strength could also complicate other central banks’ efforts to fight inflation as it makes their currencies cheaper. The European Central Bank, which concludes its monetary policy meeting on Thursday, has also pushed back against rate cut talk due to sticky inflation. Signs that the euro zone’s policymakers might further delay easing could boost the euro at the dollar’s expense.

Market Forecast and Investor Reactions

Strategists are still broadly bearish on the dollar, though the dollar’s persistent strength is testing their outlook. While the median forecast among currency strategists is for the dollar to weaken over the rest of the year, some 80% believed there was a risk of the dollar exceeding their target, a Reuters poll showed in February.

Paul Mielczarski, head of macro strategy at Brandywine Global, sees the dollar’s recent rebound as more of a “tactical rally as opposed to a change in the underlying trend overall.”

Mielczarski is encouraged by nascent signs of improving growth outside the U.S., including strength in the global semiconductor cycle, which benefits currencies like the Korean won.

Future Trends and Geopolitical Factors

Analysts at Capital Economics wrote that Trump’s proposed tariff increases could shift the Fed back to a tightening bias on monetary policy and set off a wider trade war that spurs safe haven demand for the U.S. currency. The dollar initially rallied after Trump won the 2016 election but fell 10.5% during his term.

While that may be far off, investors will still likely be hesitant to renew bearish bets against the greenback, Macquarie’s Wizman said.

“I think it’s a ‘show me’ story,” he said. “The amount of skepticism on the part of traders is high.”

GRAPHIC: Bears back off https://tmsnrt.rs/3T5jgN0

GRAPHIC: Surprisingly good https://tmsnrt.rs/3IskahC

(Reporting by Saqib Iqbal Ahmed; Editing by Ira Iosebashvili and Richard Chang)

(([email protected]; @SaqibReports; +1 332 219 1971; Reuters Messaging: [email protected]))

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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