The euro/dollar may rise to the 1.20 region by the end of next year.

However, a number of things need to fall into place for this to happen. The main one is that the monetary cycle turns, particularly in the US, and that this lifts asset prices like bonds and stocks. This second part of the story – stronger asset prices – is very important. For if the Fed were to ease policy into a declining asset price environment, chances are the dollar would rise, not fall.

For those who think that forecasting currencies is just about getting monetary policy trends correct, and that the US dollar rises as US rates increase and falls when they are cut, they need to remember that the steepest rallies in the US dollar have usually been when the Fed is cutting rates the fastest.

“We see this when adverse shocks occur, like the global financial crisis, or Covid, when a scramble to buy dollars creates such a shortage that central banks have to come in via liquidity swaps with the Fed to meet this voracious demand for the greenback”, said the Standard Bank.

Hence, it is absolutely crucial that if an easing cycle from the Fed is to lower the dollar it has to be done against the backdrop of stable asset prices at the very minimum and, better still, asset price strength. If asset prices slump all bets are off the table when it comes to the idea of a weaker dollar. A corollary of this is that policy easing looks as if it needs to occur against the background of what might be termed a ‘soft-landing’ scenario. This is one in which inflation drifts nicely down to target, economies don’t roll over into deep recessions and the Fed can afford to bring rates down at a steady pace. This might seem hard to believe but it does seem as if it is the way things are going at the moment, at least in the US.

Europe is weaker and hence there’s a greater chance that the likes of the ECB and BoE will have to cut rates sooner than the Fed and in a more panicked way. This could clearly weigh on the pound and the euro against the dollar. But as long as the Fed is believed to be on board with the rate cut idea, we’d still assume a longer term slide in the greenback with the 1.05-1.10 range for euro/dollar breaking to the high side, not the low side.

Is it possible that this sort of weakness in the dollar that we envisage could be compounded by some of the more negative factors that seem to be around at the moment? One of these is the issue of government debt sustainability; something that seems to have weighed on treasuries and could drag the dollar down as well.

Another is the presidential election in the US that’s just under a year away. We wait to see if former President Trump will win the Republican nomination but, if we assume that he does, and that his poll lead over Biden remains, policies suggested by Trump, such as an across-the-board 10% tariff on imports could conceivably turn a trickle of dollar weakness into an avalanche. It might be the case that high US policy rates and bond yields in the recent past have cushioned the US dollar against some of these issues. But that could all change as US rates come down, which we expect in the second half of 2024.

In other words, lower US rates seem crucial to the story of a weaker dollar in 2024, but so too is asset price strength, while the icing on the cake for the bears could be US politics. Right now, in the Standard Bank’s view thinks the odds are better-than-even that we will get all of these things and that euro/dollar can finally break free from the 1.05-1.10 trading range to aim for 1.20 next year and 1.30 the year after.