The consensus trade coming into 2024 has been to position for a weaker US dollar (USD). However, the USD has strengthened vs. all G10 currencies so far this year on a spot return basis. We discuss what’s driving the unexpected strength and whether it might continue.

What does this mean for fixed income investors?

In the medium term, we continue to expect a softer USD, premised on expectations of a soft landing for the US economy and its convergence with economies in the rest of the world. We expect the stock-bond correlation to normalise, with inflation now closer to central bank targets, which will further reduce some of the USD’s premium. We think the Fed’s rate cuts will help undermine the USD’s carry profile, which has been a source of USD strength over the last two to three years, particularly against Asian currencies. We also expect high-carry emerging market (EM) currencies with strong fundamentals, such as the Brazilian real and the Indian rupee, to perform well in this environment. Additionally, we see scope for the USD to underperform other safe haven currencies, such as the Swiss franc and the yen, in a hard-landing scenario due to the large increase in unhedged US foreign liabilities to surplus regions like Europe and Asia. Repatriation towards surplus countries in a hard-landing scenario could therefore play out negatively for the USD. 

About the Bond Bulletin

Each week J.P. Morgan Asset Management's Global Fixed Income, Currency and Commodities group reviews key issues for bond investors through the lens of its common Fundamental, Quantitative Valuation and Technical (FQT) research framework.

Our common research language based on Fundamental, Quantitative Valuation and Technical analysis provides a framework for comparing research across fixed income sectors and allows for the global integration of investment ideas.

 

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