Currency volatility has fallen significantly from the high levels reached in 2022. As for the dollar, this means that it has moved in a narrow range since January 2023. The first two months of 2024 have brought almost no changes. To understand how to move, we spoke with Claudio Wewel, FX Strategist at J. Safra Sarasin.
Does US resilience justify the dollar’s current valuation?
“From a relative macro perspective, it should be recognized that the US economy continues to benefit from much stronger data than other developed markets, which should benefit the dollar at its current valuation as long as US growth is higher than elsewhere. However, we expect the US cyclical outperformance to fade at some point as the labor market normalizes and the savings rate rises.”
Instead, what is your view on the euro?
“In our view, cyclical currencies now appear better supported than a few months ago. Recent data suggests that global PMIs fell to a low late last year, which was particularly visible in the manufacturing sector. There was a particular improvement in new orders, suggesting that companies are replenishing inventories. We therefore believe that the relative improvement in cyclical momentum should give the euro an advantage against the dollar at the margin, considering that euro area PMIs are coming out of low levels and that Germany has probably passed the peak of pessimism. Manufacturing PMIs are likely to have fallen to a low in H2 2023 (Markit Manufacturing PMIs).”
What impact could the ECB’s policy have on the euro-dollar exchange rate?
“Even from a monetary policy point of view, we expect little impetus for the currency market. In principle, central bank rate cutting trajectories are substantially flatter than markets expected earlier this year. However, in relative terms, the implications are very limited. Markets currently expect the Fed to make its first rate cut in June and the ECB around the same time. Given that price dynamics have proven to be more persistent in the United States, we believe that the Fed will make only three cuts this year compared to the four envisaged by the ECB, but we think that the current levels of the euro-dollar exchange rate already take this sufficiently into account divergence”.
What about the other G10 currencies?
“We expect the pound-dollar exchange rate to be supported at current levels as long as the BoE maintains its hawkish stance. Given the high wage growth and pronounced rebound in services, this is not unlikely. We expect the yen to make the biggest gains against the dollar. However, in light of the weakness of the Japanese economy and recent statements by BoJ officials, markets have reduced their expectations on the future rate hike path. We therefore believe that the yen’s appreciation path against the dollar is also likely to be more gradual than we anticipated last year, but should allow for a relatively higher upside for the yen versus other major currencies excluding the dollar.”
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