On Thursday Eastern Time, Deutsche Bank released a report stating that although the market has generally expected the Federal Reserve to cut interest rates this year, the US dollar is still expected to strengthen this year.
Analysts predict that in the first few months of 2024, the US dollar to euro exchange rate will rise from the current $1.097 to $1.05. At the same time, the exchange rate between the US dollar and the Japanese yen will also appreciate from the current 145 yen exchange rate to 150 yen exchange rate.
The pace of interest rate cuts by the Federal Reserve will be later than other G10 countries
George Saravelos, head of foreign exchange research at Deutsche Bank, said that the main reason for the strengthening of the US dollar is that the Federal Reserve's monetary policy is expected to shift towards dovism later.
He explained that compared to the United States, the overall situation of economic growth and inflation cooling in other G10 countries is worse, and it is expected that other economies will have to turn to interest rate cuts earlier. The United States faces the least urgency in relaxing monetary policy and is expected to maintain high interest rates for a longer period of time, which will provide further support for the US dollar.
&Amp; Quota; Given the high starting point of interest rates, the market expects the Federal Reserve to become the mildest central bank in monetary policy over the next two years. But we have reason to doubt whether this situation will immediately become a reality once pricing is determined& Amp; Quota; Saravelos wrote in the report.
On Thursday Eastern Time, the unexpectedly stronger than expected December CPI data provided further support for the Federal Reserve's expectation of delaying interest rate cuts.
The Federal Reserve's 2024 vote committee member Mester has stated after the release of the CPI report that it is too early for the Fed to cut interest rates in March. This stance contradicts current mainstream market expectations, as the market has generally anticipated that the Federal Reserve may cut interest rates in March in recent months, and the US stock market has therefore continued to rise in recent times.
Deutsche Bank also predicts that even after the Federal Reserve cuts interest rates, the US dollar may not necessarily decline. They pointed out that looking back at history, the US dollar often strengthened after six previous easing cycles by the Federal Reserve.
They mentioned that from recent easing cycles, the US dollar has not fallen significantly during the easing cycle. On the contrary, the US dollar may only weaken if the US falls into recession - and most economists believe that the US is unlikely to fall into recession this year.
Geopolitical conflicts and US elections will support the US dollar
In addition, Deutsche Bank has proposed that geopolitical turmoil and global uncertainty brought about by the US election will further support the US dollar.
As a safe haven currency, the US dollar often receives a boost during international turbulence. On Thursday Eastern Time, the British and American forces carried out a large-scale airstrike on the Yemeni Houthi armed forces, further escalating the Red Sea conflict. With the geopolitical turmoil, market risk aversion may further rise, and investors may continue to hold the US dollar.
At the same time, the market will begin to digest their expectations for the US presidential election around March, by which time the two candidates from both parties should already know. At present, Trump is far ahead in Republican polls and is expected to become the Republican presidential candidate.
Deutsche Bank analysts wrote in a report, "Prior to the release of congressional election results, the United States continues to face policy uncertainty domestically. The market is most likely to focus on Trump's foreign policy and trade priorities, including a policy of imposing a 10% comprehensive tariff on imported goods, which could have a substantial positive impact on the US dollar."