US dollar still likely to weaken later in 2024

The US dollar has started the year on the front foot as US growth and inflation again surprised to the upside, prompting the Fed to (again) take a more hawkish stance than other major central banks. In our view, a continued rise in US Treasury yields – driven, for example, by stubborn inflationary pressures in the US preventing the Fed from cutting rates this year – remains the key upside risk for the dollar; the yen and renminbi are already at critical levels of weakness against the dollar and, if they fall further, could spur broad-based weakness in other major currencies. But our base case is that the greenback will edge lower for two key reasons. First, we think the tailwind from rising US Treasury yields has largely run its course, as our base case is that the Fed will start its easing cycle in June. Second, we think the backdrop of a recovering global manufacturing cycle and strong risk sentiment will soon be a headwind for the dollar. After all, periods of upturns in global manufacturing – proxied, for example, by a rise in the global manufacturing PMI – have tended to coincide with a weaker dollar.