King dollar makes a comeback: buck on track for best start to a year in nearly a decade.

By Joseph Adinolfi

The U.S. dollar is surging out the gate in 2024 after a difficult run that left the buck in oversold territory at the end of last year, according to several analysts.

The ICE U.S. Dollar Index DXY has risen 0.7% to 102.3 on Friday, leaving it on track for its best performance during the first four days of a year since 2015, when it climbed 1.9%, according to Dow Jones Market Data.

The index is also on track for its biggest weekly advance since Nov. 10.

The first-week gains follow a disappointing year for the greenback, which tumbled in late 2023 as the Federal Reserve penciled in three interest-rate cuts next year, with investors pricing in even more. Lower interest rates make currencies less attractive to international investors in the global currency market.

The index, which is most heavily weighted against the euro, fell 2.1% last year after rising 7.9% in 2022. It briefly touched its highest level in more than 20 years in September when it traded above 114, FactSet data show.

U.S. dollar’s top five first four days on record

   1/6/2005  2.9% 
   1/7/1988  2.8% 
   1/6/2011  2.2% 
   1/7/1991  2% 
   1/7/2015  1.9% 

Currency-market watchers have a few theories about what’s driving the dollar higher this week.

Some credited investors rethinking Fed interest rate-cut expectations that far outpace what the central bank itself is signaling, saying that the big trades from the fourth quarter of 2023 – long stocks, long bonds and short the greenback – had become overextended.

“The market came into 2024 short the U.S. dollar and fixed income. Now we’re unwinding some of these positions as questions emerge on how fast the Fed is likely to move,” said Steve Englander, head of North America macro strategy at Standard Chartered, in commentary shared with MarketWatch.

Minutes from the Fed’s previous policy-committee meeting released earlier this week showed senior officials at the central bank still expect to cut interest rates this year, although they said the timing is more difficult to ascertain, and that more rate increases would remain a possibility.

See: Fed officials haven’t ruled out further rate increases, minutes show

The dollar was trading lower on Thursday, down 0.1% at 102.3, after a barometer of business conditions released earlier showed that service-oriented companies fell in December to a seven-month low, helping to boost risky assets like stocks at the expense of the dollar.

The services-sector data followed a Labor Department report which, despite showing more than 200,000 jobs were created last month, also featured indications of weakening activity, as MarketWatch reported.

See: Jobs report isn’t quite as strong as it looks

-Joseph Adinolfi

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01-05-24 1230ET

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