Dollar Nears 2023 Low, Analysts Predict 9% Drop by 2024

The U.S. dollar has been on a downward trajectory, approaching its lowest point for the year 2023. Wall Street analysts are predicting that this depreciation will continue, driven by a combination of factors including expectations of interest rate cuts, slowing economic growth, and the impact of Donald Trump's trade and tax policies on the currency.

Wall Street banks are reinforcing their predictions that the dollar will weaken further. Morgan Stanley anticipates that by mid-2024, the dollar will fall to levels last seen during the COVID-19 pandemic. JPMorgan Chase also maintains a bearish outlook on the dollar. Goldman Sachs warns that if tariff measures are obstructed, Washington's efforts to explore alternative revenue sources could have an even more negative impact on the dollar.

On Monday, amidst escalating global trade tensions, the dollar fell against all G10 currencies. The dollar index declined by 0.5%, extending its downward trend since early April and nearing its lowest level since July 2023. Analysts noted that interest rates and currency markets have entered a significant long-term trend, with the dollar expected to depreciate sharply and the yield curve to steepen significantly after two years of wide-ranging volatility.

The bank predicts that by the same time next year, the dollar index will drop by approximately 9% to 91 points. Trump's trade policies have eroded market confidence in U.S. assets and sparked global rethinking of dollar dependency. However, data indicates that bearish sentiment has not yet reached historical extremes, suggesting that the dollar could weaken further.

Last week, strategists reinforced their negative outlook on the dollar, advising investors to bet on the Japanese yen, euro, and Australian dollar. The euro and yen are identified as the currencies most likely to benefit from the dollar's depreciation, along with the Swiss franc.

On Monday, the euro rose to a five-week high, with forecasts suggesting it could reach approximately 1.25 dollars by next year. The pound could rise from 1.35 dollars to 1.45 dollars, driven by high carry returns and lower trade tension risks. Analysts added that the yen could appreciate from 143 yen to 130 yen.

It is also projected that the 10-year U.S. Treasury yield would reach 4% by the end of this year, dropping sharply next year as the Federal Reserve cuts interest rates by 175 basis points. On Monday, the yield rose by 4 basis points to 4.44%.

Investors this week will focus on a series of U.S. labor market indicators, including the May employment report, to gauge the next steps in Federal Reserve policy and its impact on the dollar. They will also closely monitor any developments in trade negotiations following mutual accusations between China and the U.S. regarding violations of a recent agreement.

Investors are particularly concerned about potential changes in U.S. tax rates for foreign individuals and corporations. This measure is included in a tax and spending bill that requires higher taxes on passive income such as interest and dividends. These incomes could come from investors holding tens of billions of dollars in U.S. assets.

"Even if the scope is relatively narrow, such tools will exacerbate concerns about U.S. investment risks at a time when investors are already viewing changes in cross-asset correlations as a reason to reduce dependence on U.S. assets and achieve greater diversification," strategists wrote in a report.

Strategists in another report stated that their models show the dollar is overvalued by about 15%, leaving room for further depreciation. They added that this decline could be driven by the reallocation and revaluation of global assets.