The performance of currencies varied during 2023, and the main factor in the rise or fall in currencies was central banks’ decisions to confront inflation. The US Federal Reserve (central bank), the Bank of England, and the European Central Bank adhered to a policy of monetary tightening, even if they deliberately fixed interest rates at the end of the year.
The dollar index, which measures the strength of the US currency against a basket of 6 major currencies, declined during 2023 by 2.1%, while yields on 10-year Treasury bonds hovered near their lowest levels since last July.
Thus, the green paper recorded its first annual loss since 2020 under the pressure of the market’s expectation that the Federal Reserve will begin cutting interest rates next March at the earliest.
According to Reuters, the questions for 2024 focus on when the Federal Reserve will start cutting interest rates, and whether the first interest rate cut will aim to avoid excessive tightening of monetary policy with low inflation, or due to slowing economic growth.
Since the US Central Bank launched its course to tighten monetary policy in March 2022, expectations related to the amount of need to raise interest have been a primary driver for the dollar. But with continued economic data indicating a continued slowdown in inflation in the United States, investors’ focus has shifted to when the central bank might start cutting interest rates. These expectations gained momentum after the tendency toward easing at the central bank’s monetary policy meeting last December.
The dollar fell
For his part, Ahmed Negm, head of the market research department at XE, expects – in a comment to Al Jazeera Net – that the price of the dollar will decline in the first half of 2024, as the Federal Reserve Bank is the only one among the central banks to announce the approaching easing of the monetary tightening policy. While the rest of the central banks are still sticking to it.
Najm added that the Fed has leeway to reduce interest rates by no less than 0.75%, which is an opportunity that other major central banks do not have.
During the past year, the euro rose by more than 3% against the US currency, recording $1.1052. The British pound also rose 5.24% against the dollar to the level of 1.2732, which is its best performance since 2017.
Najm also expects the euro and the British pound to benefit from the expected decline in the dollar in the first half of 2024, but it is likely that they will decline with the adoption of an accommodative policy in the second half of the year in exchange for stability or a rise in the dollar.
Central banks and gold
In this context, central bank decisions and expectations regarding them were the primary driver of gold and stock prices globally, as lowering interest rates meant more investments going into stocks or gold.
In 2023, gold recorded its best annual performance in 3 years, supported by expectations that the Federal Reserve will begin easing its monetary policy in March 2024.
Gold ended 2023 transactions at $2,062.49 per ounce, when the last 2023 transactions were settled, but US futures contracts recorded $2,074.50 per ounce.
The yellow metal rose about 14% in 2023 amid volatile performance, as prices moved between low levels near $1,800, earlier in the year, before rising to a record level of $2,135.40 on the fourth of last December.
