Title: Citi: Relative US Economic Resilience Reinforces Support for the Dollar
Original Author: FX Insights, EFXData
Original Source: “Citi: Relative US Economic Resilience Reinforces USD Support” – EFXData.com
Overview
Recent analysis from Citi highlights the growing divergence between the US economy and those of other major developed markets. This divergence has resulted in steady support for the US dollar (USD), particularly against a backdrop of global economic stagnation. While the USD’s appreciation has been gradual rather than dramatic, key data points continue to indicate relative strength in the United States, underpinned by robust labor market conditions, consumer spending, and services inflation.
Citi believes that as long as these dynamics remain intact, the USD is likely to remain well-supported, especially against currencies tied to economies experiencing disinflationary pressures and weakening data trends.
Key Points:
– While the broader trend remains a grind higher for the dollar, the strength is rooted in U.S. economic resilience.
– Peer currencies, especially the euro (EUR), Japanese yen (JPY), and Antipodeans (AUD, NZD), continue to show signs of vulnerability.
– In contrast to early-year views that anticipated synchronized global recovery and near-term policy normalization, recent developments point instead to growth divergence favoring the US.
Factors Supporting the USD
Citi’s analysis points to several key factors supporting the dollar in 2024. These include:
1. Strong US Macroeconomic Fundamentals
– The US economy has shown a relatively strong performance compared to its G10 peers.
– Key metrics such as GDP growth, employment, and services sector activity have outperformed.
– The US labor market remains tight, with low unemployment rates and resilient job creation.
– Consumer spending continues to act as a key driver, supported by wage growth and excess savings.
– Sticky services inflation points to ongoing demand-side pressures even as goods inflation moderates.
2. Diverging Central Bank Policies
– The Federal Reserve (Fed) has taken a more patient and data-dependent approach to rate cuts.
– Markets have revised expectations for the timing and magnitude of Fed cuts throughout 2024, now pricing in fewer cuts than previously expected.
– In contrast, the European Central Bank (ECB), Bank of England (BoE), and central banks in economies such as Canada and Australia are expected to ease sooner, pressured by falling inflation and weaker growth.
– Citi notes that this divergence should lend further support to the USD, particularly if real rate differentials continue to favor the United States.
3. Waning Global Growth Momentum
– Weak activity data from Europe, China, and other key global economies highlight the fragility of the recovery outside the US.
– In Europe, GDP growth remains sluggish, and inflation is moderating in a way that supports earlier policy easing.
– The Chinese economy continues to wrestle with structural issues, including deleveraging in the property sector and soft domestic demand, weighing heavily on regional currencies.
– The breakdown in synchronized global growth expectations has given the dollar a structural advantage as a safe-haven and yield differential play.
4. USD as a Safe-Haven Currency
– In times of global economic uncertainty or deceleration, the USD tends to attract flows as a safe store of value.
– With geopolitical tensions still elevated and market volatility not entirely absent, the dollar has benefitted from inflows directed at US assets, particularly Treasury securities.
– US fiscal policy, while expansionary, supports higher yields – which keeps USD assets attractive in a low inflation-adjusted yield global environment.
5. Reassessment of Earlier Market Narratives
– At the beginning of 2024, consensus forecasts called for multiple rate cuts in the US and a broad USD downtrend.
– Those expectations were predicated on the assumption that inflation would return to target and growth would slow meaningfully.
– However, Citi points out that the combination
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