Let’s kick off a quick recap of the year for the U.S. dollar. Because it is the global reserve currency and the U.S. financial system is the largest and “safest” in the world, movements in the U.S. dollar and U.S. yields are massively influential across the broad financial markets.
So, it’s usually a good practice to review the Dollar’s behavior around events and news catalysts, identify pattern and correlation behaviors to gain insights and understanding, potentially improving our ability to recognize significant drivers and anticipate future moves.
Of course, there’s a lot that happens to the U.S. dollar over the course of the year to cover, so we’ll break this up into a series of posts, ending with a post on takeaways from the review and considerations to have for 2025.
We’ll start the series with a quick recap of the start of the year to mid-April, which saw a broad rally higher with a short-term dip in February.
U.S. Dollar Index vs. U.S. 10-year Treasury yield: Daily Chart by TradingView
January 1st to February 14th: Gain of around +3.37% in the U.S. Dollar Index
The U.S. Dollar’s strong start to 2024 likely stemmed from a combination of reduced Fed rate cut expectations and safe-haven flows. This dynamic appeared to be validated when the dollar gained significant ground following reports in January of U.S. and U.K. military action against Houthi rebels in Yemen, suggesting geopolitical risks were a meaningful driver of dollar strength during this period.
The January 11th U.S. CPI report may have been the catalyst that cemented the dollar’s upward trajectory in January. With inflation coming in at 3.4% year-over-year versus expectations of 3.2%, traders appeared to dramatically reassess their rate cut expectations, as evidenced by the CME FedWatch Tool showing March cut probabilities dropping from over 70% to around 50%.
The February 2nd jobs report hit the markets like a caffeine shot to a Monday morning trader. The surprisingly strong addition of 353,000 jobs versus expectations of 175,000 had dollar bears spitting out their coffee, while wage growth acceleration probably had Fed hawks doing high-fives in the hallways. The data likely reinforced the market’s growing conviction in the Fed’s “higher for longer” narrative, though we can’t confirm the high-fives actually happened.
Interest rate differentials appeared to play a supporting role in the dollar’s rally, particularly after the Bank of Japan maintained negative rates at its January meeting while only hinting at potential future policy changes. This policy divergence could help explain why USD/JPY moved above the closely watched 150.00 level during this period, though other factors may have contributed to this move as well.
February 14th to March 11th: Decline of around -2.43% in the U.S. Dollar Index
The U.S. Dollar experienced a notable decline between mid-February and early March 2024, likely driven by two main factors:
First, market expectations for Federal Reserve rate cuts appeared to strengthen despite sticky inflation readings. While the February U.S. CPI came in hot at 3.1% y/y, Fed officials like Austan Goolsbee and Treasury Secretary Yellen downplayed the numbers, with Yellen quipping that it’s “a tremendous mistake to focus on minor fluctuations.” Talk about throwing shade at the inflation hawks!
Second, some U.S. economic data releases during this period generally pointed to cooling U.S. growth, particularly in the retail sector. The January U.S. retail sales report released in February showed a surprising drop of -0.8% m/m (versus -0.2% expected), which probably had dollar bulls questioning their life choices at that moment. Or at the very least, take some long Dollar profits for the time being.
March 12th April 16th: Gain of around +3.32% in the U.S. Dollar Index
The U.S. Dollar’s 3.2% rise between March-April 2024 appears to have been primarily driven by two key factors: stubborn U.S. inflation data and increasingly hawkish Fed rhetoric pushing back against rate cut expectations.
The March 12th U.S. CPI report showing 0.4% m/m inflation (vs 0.3% expected) and the hotter-than-expected February PPI data (0.6% m/m vs 0.3% expected) update released on the 14th was like a shot of espresso for dollar bulls – suddenly everyone who was dreaming of summer rate cuts had to wake up and smell the “higher-for-longer” coffee! These data points plus the Fed setting expectations for only three cuts in the year at their March FOMC meeting sent bond yields surging and kicked off the dollar’s upward momentum in March.
The bullish case for USD strengthened further through April as Fed officials, led by Chair Powell, systematically dismantled market expectations for imminent rate cuts. The bulls were also supported by ANOTHER hot update from the U.S. CPI report, with the annualized rate rising above both expectations and the previous reads–not the direction U.S. dollar bears and broad risk-on players wanted to see. This prompted one final push higher before the second quarter pullback.
Summary:
The dollar’s journey through early 2024 tells a compelling story of resilience amid shifting market narratives. From weathering hot inflation prints to riding the waves of Fed officials’ increasingly hawkish rhetoric, the greenback demonstrated why it remains a focal point for global markets. The dance between economic data and policy expectations created multiple swing opportunities for traders who stayed alert to these key fundamentals.
As we gear up to explore the dollar’s mid-year movements in our next update, remember that understanding these patterns and correlations could prove invaluable for navigating future market conditions, or be helpful when reviewing your own trading journal!
Stay tuned for Part 2 of our 2024 Dollar Recap, where we’ll dive into how the world’s reserve currency handled the evolving economic landscape through the summer months through September!