Dollar Edges Up on Bets of US Growth, Inflation

The US Dollar has been on a steady ascent in 2024, driven by a combination of factors that have bolstered investor confidence in the greenback. The dollar's strength can be attributed to a resilient US economy, sticky inflation, and market expectations for continued growth and higher interest rates.

The Conference Board Economic Forecast for the US Economy (October 23, 2024) highlights the ongoing resilience of the US economy. Real GDP growth for Q3 2024 was revised up to 2.5% Q/Q annualized, reflecting stronger consumer spending and a healthy labor market. This upward revision indicates that the US economy is displaying continued resilience, despite looming uncertainties and persistent shocks.

Consumer spending, which accounts for a significant portion of US economic activity, has shown strength. In the Conference Board's report, it was noted that real GDP growth for Q3 2024 was largely driven by stronger consumer spending, increased after-tax income, and higher savings among US households. This indicates that US households have been spending more, which is a positive sign for economic growth.

Business investment has also played a role in sustaining US economic growth. While businesses have held back on major capital investments, likely due to US elections uncertainty, they have been pouring dollars into intellectual property (IP) and human capital. This is evident in the Conference Board's report, which suggests that businesses are investing in intangible assets that can drive long-term growth. Additionally, industrial policies continue to drive government spending, and nonresidential investment in infrastructure and factories in the quarter. This indicates that businesses are still investing, albeit in different areas, which can support economic growth.

The Conference Board's report also highlights the importance of labor market conditions in driving economic growth. A healthy labor market, characterized by low unemployment rates and robust job creation, supports consumer spending, which is a key driver of economic growth. In the report, it was noted that "a healthy labor market continues to support consumption," which is a key driver of economic growth.

The Congressional Budget Office's (CBO) economic projections also underscore the role of labor market conditions in sustaining economic growth. In its projections, the CBO expects the unemployment rate to rise from 4.2 percent in the fourth quarter of 2024 to 4.4 percent in the second quarter of 2026, which could slow down economic growth and contribute to a downward movement in inflation over the next three years. This underscores the importance of labor market conditions in maintaining economic growth and stability.

The US Dollar's notable strength in 2024 has also been supported by the resilience of the US economy, particularly when compared to its global peers. The Conference Board's report notes that the US economy is "in a very good place," with the US Dollar's strength underpinned by the resilience of the US economy and the prospect of fewer interest rate cuts in the US.

The Conference Board's report also highlights the impact of market expectations for inflation on the dollar's strength. When inflation expectations rise, investors tend to seek refuge in the US Dollar due to its perceived stability and low risk. This increased demand for the greenback drives up its value against other currencies. Conversely, when inflation expectations fall, the demand for the US Dollar as a safe-haven currency decreases, leading to a decline in its value.

In the context of the provided materials, the following quotes and data illustrate these points:

* "The prospect of fewer interest rate cuts in the U.S. has taken the dollar to new highs — and should underpin its resilience going forward." (J.P. Morgan Research, April 30, 2024)
* "The US Dollar Index (DXY) resumed its uptrend, climbing past the 108.00 barrier for the first time since November 2022... This upward move in the index was mirrored in key 10-year Treasury yields, which surged to the 4.50% region—multi-month highs—by mid-November." (The Conference Board Economic Forecast, October 23, 2024)

These quotes and data demonstrate the relationship between US inflation expectations, interest rates, and the strength of the US Dollar. As inflation expectations rise, interest rates increase, making the US Dollar more attractive and driving up its value. Conversely, as inflation expectations fall, interest rates decrease, making the US Dollar less attractive and driving down its value. Additionally, the US Dollar's status as a safe-haven currency means that changes in inflation expectations can influence investor sentiment and risk tolerance, further impacting the strength of the US Dollar.

In conclusion, the US Dollar has been on a steady ascent in 2024, driven by a combination of factors that have bolstered investor confidence in the greenback. The dollar's strength can be attributed to a resilient US economy, sticky inflation, and market expectations for continued growth and higher interest rates. The Conference Board's Economic Forecast for the US Economy and the Congressional Budget Office's economic projections highlight the importance of labor market conditions, consumer spending, and business investment in sustaining US economic growth. The relationship between US inflation expectations, interest rates, and the strength of the US Dollar underscores the significance of market expectations in driving the dollar's value. As inflation expectations rise, interest rates increase, making the US Dollar more attractive and driving up its value. Conversely, as inflation expectations fall, interest rates decrease, making the US Dollar less attractive and driving down its value. The US Dollar's status as a safe-haven currency means that changes in inflation expectations can influence investor sentiment and risk tolerance, further impacting the strength of the US Dollar.