The US Dollar Index reached near 103.50 as 2023 comes to an end. It reached a low of 99.22 and a high of 107.05 during the year, currently standing at 102.10 at the time of writing. There have been significant opportunities for a low year-end close. In the first half of this year, the US dollar fluctuated repeatedly with a range of about 500 points. In the latter half, it quickly dropped to a yearly low, followed by a strong upward trend for four months, reaching the level of 107. However, the US dollar sharply reversed its course from November onwards and experienced a rapid decline, essentially erasing its gains for the year. 

Although the United States experienced a banking crisis during the year, it was quickly brought under control and did not have a significant impact on the economy. The Federal Reserve raised the federal funds rate four times this year, reaching a high range of 5.25 - 5.5%, in an effort to curb inflation. This led to the 10-year Treasury bond yield reaching 5% at one point. By consistently raising interest rates, inflation was ultimately brought down from its peak of 9.1% in mid-2022 to 3.1%. However, in the past two months, there has been a noticeable change in the Federal Reserve's monetary policy tightening stance, causing the 10-year Treasury bond yield to rapidly fall by over 1%. This is the main reason for the decline in the US Dollar Index. 

Federal Reserve Chairman Powell stated after the December interest rate meeting that there is no need to wait for inflation to return to 2% before cutting interest rates, suggesting that discussions about the timing of rate cuts can begin. The latest dot plot also indicates that interest rates may be cut three times next year, one more time than previously predicted. The market believes that there is a close to 70% chance that rate cuts will begin as early as March next year. Some major banks have even more aggressive predictions regarding the magnitude of rate cuts for the entire year, depending on whether the economy experiences a recession. Looking at the latest economic data, although job growth has slowed down, the labor market remains stable, and retail sales are also decent. There are currently no obvious signs of a recession. Market expectations for rate cuts by the Federal Reserve may be too high, but the impact of high interest rates on the economy still needs to be monitored. From a chart perspective, the US Dollar Index is still in a downward trend, with key resistance now around 104 and initial resistance at 103.00. It is advisable to consider short positions at higher levels. 

As for the fundamentals, the US economy is still better than the Eurozone and the UK. However, the recent monetary policy stances of the European and British central banks have been relatively stronger than that of the United States, which may have some positive effects on short-term trends. However, it is not certain if they can sustainably drive exchange rates higher. There will be resistance for the Euro around 1.10/1.11 and for the British Pound near 1.2830, so chasing long positions at higher levels is not recommended. It is worth noting the Japanese Yen as well. On December 19, the Bank of Japan will announce its interest rate decision, and it is believed that there may not be any significant policy adjustments. However, the central bank governor and other officials have recently indicated clearly that they will end the negative interest rate policy soon, with a higher chance of taking action early next year. The US dollar has also temporarily fallen below 141 against the yen. The chart shows that during this downward trend of the US dollar from above 150, any rebounds have been consistently capped by the 10-day moving average (144.10). This reflects significant selling pressure on the US dollar, possibly due to unwinding of carry trades in the market. It is advisable to sell the US dollar at higher levels, with an initial target of 137/138. Finally, I wish you all successful investments in the New Year of 2024!

Patrick Law

Chief Operating Officer of Hantec Group