- Economic experts have a bearish forecast on the US dollar, citing that it is likely to “consistently weaken” throughout 2024 as the US Federal Reserve winds up its aggressive stance.
- The prediction comes despite the ongoing big dollar sell off where asset managers are selling the currency at the fastest pace in a year.
- This is positive news for emerging and frontier markets, as they can start to see global funds and investors redirect capital back to these markets which have been starved of inflows for months.
Economic experts are making a bearish forecast against the US dollar, predicting that it is likely to “consistently weaken” throughout 2024 as the US Federal Reserve concludes its aggressive interest rate hiking agenda.
Nigel Green, CEO of the DeVere Group, states that this prediction persists despite the ongoing significant dollar sell-off, where asset managers are selling the currency at the fastest pace in a year. “We expect this trend to gain momentum throughout 2024 as investors increasingly believe that the Federal Reserve’s most aggressive interest rate hiking campaign in a generation is winding down.
“The dollar traditionally performs well at the start of the year, but it is likely to consistently weaken during the course of next year as the Fed moves to ease its grip on rates.
The battle against inflation globally
“With the battle against inflation being won, it can be expected that the central bank will roll out multiple rate cuts in 2024, prompting investors to think that holding so many dollars is not as necessary.”
The expectation is that lower interest rates will reduce the attractiveness of dollar-denominated assets. As interest rates in the US decline, the interest rate differential between the dollar and other currencies narrows, diminishing the yield advantage that has historically drawn investors to the greenback.
Furthermore, the possibility of multiple rate cuts by the Fed is prompting investors to seek higher-yielding assets elsewhere, contributing to the accelerated exit from the dollar.
“Alternative investments in currencies from regions with more favorable interest rate outlooks become increasingly appealing as the interest rate differentials shift in their favor.”
The reverberations of this dollar sell-off extend beyond the borders of the US. “A weakened dollar has implications for global trade, as a depreciating currency can boost US exports but may also lead to tensions with trading partners,” says the DeVere Group CEO.
“In addition, emerging market economies, which often carry significant levels of dollar-denominated debt, will experience relief as the burden of servicing this debt is alleviated with a weaker dollar.” He concludes: “As investors bet big on the Fed cutting rates, 2024 could be dubbed ‘the year of the dollar dive.”
Weakening US dollar positive news to emerging markets
Speaking to The Exchange, Africa Standard Investment Bank Executive Director of Research, Eric Musau, said this is positive news for emerging and frontier markets.
“We will start to see global funds and investors redirect capital back to these markets, which have been starved of flows during this period of high and aggressive rate hikes,” he said.
The latest data from the Central Bank of Kenya (CBK) indicates that Kenya lost over $345 million worth of foreign direct investment (FDI) in the first quarter of 2023.
According to the data, the country’s net financial account inflows dropped by 34 percent to $660 million in the first quarter of 2023, compared with inflows of $1 billion in the same period in 2022.
Kenyan currency against the US dollar
For the first time in Kenya’s history, the country’s currency surpassed the KES150 mark against the US dollar in October 2023.
The weakening of the Kenyan currency is attributed to high public debt, depleted government revenues, and the strengthening of the US dollar in the global market, mainly as a result of several crises, including Ukrainian and Middle East conflicts.
Kenya is also a net importer of goods, meaning it imports more than it exports, thus affecting the inflow of foreign currency. The Kenyan currency’s value also depreciated against other currencies, with the value of one Sterling Pound now at KES182.23, while the Euro traded at KES158.67.