Dollar Set for Worst Annual Performance in 2023

The dollar is on track to record its worst annual performance since the outbreak of the “Coronavirus” pandemic, amid Wall Street’s bets on the Federal Reserve Bank reducing interest rates after curbing inflation.

“Bloomberg” stated in its report that the dollar witnessed a sudden shift in its direction following calls for the Federal Reserve to end the raising interest rates, causing the greenback currency index to decline by approximately 3% this year, which represents the largest annual decline for the U.S. currency since 2020.

Most of the dollar's declines occurred in the fourth quarter as a result of growing bets on the Federal Reserve easing its policy next year amid the slowdown in the US economy. This limits the attractiveness of the dollar because other central banks may keep interest rates high for a longer period.

Swaps traders are now anticipating a rate cut of at least 150 basis points, with the first rate cut in March. This is up from less than 100 basis points in mid-November and double what policymakers expected at their most recent meeting.

Markets are bracing for a scenario where the Fed cuts interest rates enough to stimulate the economy without igniting inflationary pressures, said Amanda Sandstrom, fixed income and grade rate strategist at SEB.

The analyst added that the dollar's weakness is likely to continue in 2024 due to weak US data, but not to the extent that might raise risk-averse bets on safe assets such as the greenback.

It is noteworthy that the dollar's recent losses indicate that there is room for recovery, at least temporarily. The 14-day Relative Strength Index of the Bloomberg Dollar Spot Index fell below 30, which is a signal to some of the current excessive selling and preparation for a trend reversal.

The dollar is likely to move ahead of the US presidential elections in November. The presence of Donald Trump, in particular, as a presidential candidate could spark political unrest and currency fluctuations, according to analysts.

In contrast, the dollar’s situation differs from its sterling counterpart, which is heading towards recording its best annual performance since 2017. The swiss franc is also on track for its strongest annual performance since 2010.

It is worth noting that the pound has jumped by more than 5% against the dollar so far in 2023, which is its largest gain since the British currency rose by 9.5% in 2017.

While the Swiss franc rose to its highest levels ever, as traders see that the Swiss Central Bank is adopting a more stringent policy compared to its counterparts.