Let’s take a quick look back at the U.S. dollar’s performance over the past year. As the world’s reserve currency and with the U.S. financial system being the largest and often considered the safest, the dollar’s movements and U.S. yields have a profound impact on the global financial markets.
Reviewing how the dollar reacts to various events and news can give us valuable insights. By identifying patterns and correlations, we can improve our ability to spot significant market drivers and better anticipate future movements.
Given the multitude of events affecting the dollar throughout the year, we’ll cover this in a series of posts. The final segment will offer insights and considerations for 2025.
Let’s start by recapping the period from the beginning of the year to mid-April. During this time, we saw a broad rally in the dollar, despite a brief dip in February.
January 1st to February 14th: Gain of around +3.37% in the U.S. Dollar Index
The U.S. dollar began 2024 on a strong note, likely due to reduced expectations for Federal Reserve rate cuts and a surge in safe-haven flows. The dollar’s ascent gained traction in January after reports of U.S. and U.K. military action against Houthi rebels in Yemen, highlighting how geopolitical risks bolstered its strength during that time.
The upward trend for the dollar seemed cemented by the January 11th CPI report, which showed inflation at 3.4% year-over-year, surpassing expectations of 3.2%. This caused traders to reassess their rate cut expectations, as evidenced by the CME FedWatch Tool indicating a drop in the probability of a March cut from over 70% to around 50%.
Then came the February 2nd jobs report, which shook the markets with an unexpected job addition of 353,000 compared to the anticipated 175,000. This surprise underscored the market’s growing belief in the Fed’s "higher for longer" approach on rates, much to the excitement of Fed hawks.
Interest rate differentials also played a supporting role. After the Bank of Japan’s decision to maintain negative rates in January while only hinting at possible changes, the USD/JPY pair rose above the critical 150.00 level, further fueling the dollar’s rally, although other factors were at play as well.
February 14th to March 11th: Decline of around -2.43% in the U.S. Dollar Index
Between mid-February and early March, the dollar experienced a decline due to two primary reasons.
Firstly, expectations for Federal Reserve rate cuts grew stronger, despite persistent inflation. The February CPI clocked in at a hotter-than-expected 3.1% year-over-year, but officials like Austan Goolsbee and Treasury Secretary Yellen downplayed it, with Yellen wittily advising against overanalyzing minor fluctuations.
Secondly, U.S. economic data, particularly from the retail sector, indicated a slowdown. Notably, January’s retail sales report released in February showed a surprising -0.8% month-over-month drop, against an anticipated -0.2%. This made some dollar bulls reconsider their positions.
March 12th to April 16th: Gain of around +3.32% in the U.S. Dollar Index
In the March-April period, the dollar rebounded with a 3.2% rise, driven primarily by stubborn inflation and a hawkish Federal Reserve pushing back against expectations of rate cuts.
The March 12th CPI report showed 0.4% month-over-month inflation, surpassing the expected 0.3%, and the February PPI data released on the 14th also came in hotter than forecast. This forced market participants to adjust their expectations for fewer rate cuts, propelling the dollar upwards.
The case for a stronger dollar grew as Fed Chair Powell, along with other officials, actively dismissed the likelihood of imminent rate cuts. Additionally, another hot CPI update in April reinforced the dollar’s bullish momentum, at least until a pullback in the second quarter.
Summary
The dollar’s journey through the early part of 2024 showcases its resilience amid changing market narratives. By navigating through hot inflation figures and the increasingly hawkish stance of Fed officials, the greenback demonstrated its central role in global markets. The interplay between economic data and policy expectations offered numerous trading opportunities for those attuned to these fundamental shifts.
As we move forward to explore the dollar’s performance in the mid-year period, stay tuned for insights on how the currency handled evolving economic scenarios through the summer months into September. Understanding these patterns is crucial for navigating future market conditions, and could be beneficial when evaluating personal trading strategies.
Stay tuned for Part 2 of our 2024 Dollar Recap!
