JPMorgan Chase says the dollar’s strength may persist this year as the firm expects the US economy to outperform other developed markets.
In a new report, JPMorgan says the US dollar has defied gravity in 2024 and could continue doing so amid increasing disparities in global growth.
The bank’s analysts say a strong US economy may push inflation well above the Federal Reserve’s 2% target and force policymakers to pause rate cuts.
“The US economy is projected to grow by 2.7% in 2024, outpacing the 1.7% growth forecast for all developed markets.
This is driven by superior productivity growth, higher business investment and fewer labor supply issues compared to other developed markets. Such robust growth, which has contributed to inflation remaining above 2%, may lead the Fed to halt rate cuts sooner than expected. This makes a dollar weakening unlikely in the short term.”
Should the Fed continue to pursue its easing cycle, JPMorgan says rate cuts will likely be minimal this year due to a strong US economy.
“The increasing divergence in global growth has led to a greater disparity in central bank policies worldwide… These differentials may remain elevated, as markets are currently pricing in only a limited number of Fed cuts next year [amounting to] 44bps (basis points), compared to 110bps for the ECB (European Central Bank) and rate hikes of 47bps in Japan.”
JPMorgan also says President-elect Donald Trump’s proposed policy changes could send the US dollar higher.
“The upcoming administration’s focus on boosting domestic manufacturing, increasing tariffs and deregulating industries could spur business growth and sustain higher interest rates, supporting the dollar.”
But while the largest bank in the US is bullish on the dollar, it says the country’s excessive reliance on foreign-made products could stifle USD’s growth.
“The U.S.’s persistent trade balance deficit, at 4.2% of GDP as of September 2024, poses a long-term constraint, highlighting a structural challenge that could eventually pressure the currency.”
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