This rewritten article is based on the original piece by eFXdata, titled “USD: The Key Drivers Behind Recent Strength — Barclays”, with added context and supporting information for a more comprehensive analysis on U.S. dollar (USD) strength.
Title: Understanding the Key Drivers of USD Strength in 2024
Source Inspiration: eFXdata Analysis via Barclays Research
Overview
The U.S. dollar has demonstrated unexpected resilience in 2024, defying common forecasts that called for broad weakness due to peaking Federal Reserve rates and global growth convergence. From January through mid-year, the USD has posted notable gains against major currencies, supported by several fundamental and technical factors. Analysts at Barclays Research highlight four serious drivers behind this strength, and wider macroeconomic analysis supports this perspective.
This article explores:
– The current context of USD strength
– Key drivers outlined by Barclays
– Additional macroeconomic forces at play
– Potential implications for forex traders and markets
USD Context in 2024
Entering 2024, many investment banks and economists anticipated a softer USD profile. The assumptions were rooted in:
– Expectations for the Federal Reserve to pivot from tight monetary policy to rate cuts
– Horizon of policy normalization across other G10 central banks
– A broadly improving global growth outlook, seen as beneficial for higher-beta currencies
However, by mid-2024, these expectations have not materialized as firmly as forecast. The USD Index (DXY), which measures the dollar against six major currencies, has remained consistently strong, trading near multi-month highs.
Four Key Drivers of USD Strength According to Barclays
Barclays Research has pointed to four main reasons behind the dollar’s unanticipated strength:
1. High and Resilient U.S. Yields
– U.S. Treasury yields, particularly on 2-year and 10-year paper, remain elevated.
– Persistent inflation, especially in core measures, has forced the Federal Reserve to delay easing plans.
– Yield differentials continue to favor the U.S., especially against Europe and Japan, where policy normalization has been weaker or delayed.
Barclays suggests that without a dovish shift from the Fed, investors still view U.S. yields as attractive relative to other majors, helping to support demand for the greenback.
2. Weakness in G10 Peers
– Other major currencies have underperformed due to domestic economic weakness or dovish monetary stances.
– Notable examples include:
– EUR: Eurozone growth remains sluggish, limiting the European Central Bank’s room for policy tightening.
– JPY: The Bank of Japan has maintained ultra-loose policy and intervened in the FX market to curb yen depreciation.
– GBP: While the Bank of England has leaned hawkish, growth concerns and political risks have capped sterling gains.
– When peers underperform, the USD benefits from lack of credible alternatives.
3. Relatively Strong U.S. Domestic Performance
– U.S. economic data has consistently outperformed expectations in 2024.
– Indicators like:
– Nonfarm Payrolls: Job creation remains strong.
– Consumer spending: Resilient due to tight labor markets and fiscal support.
– Services sector activity: Robust growth reflected in ISM Services PMIs.
– Solid domestic consumption and investment lend credibility to the Fed’s cautious stance on rate cuts, reinforcing dollar appeal.
4. Receding Expectations of Fed Cuts
– At the start of the year, markets priced in as many as five cuts by the Fed.
– Sticky inflation data (notably in services and shelter) and resilient labor market dynamics have forced a re-pricing.
– As of Q2 2024, Fed funds futures indicate only one or two cuts at most this year.
– Diminishing expectations for monetary easing have directly supported the USD via rate differentials and confidence in U.S. economic leadership.
Broader Macro Forces and Technical Considerations
In addition to the four drivers highlighted by Barclays, other macroeconomic and
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