Global | Currencies hold up in a challenging environment

The first half of 2024 has been a period of high volatility in the foreign exchange markets, with various changing factors significantly influencing behavior. Ultimately, since the beginning of the year, there have been moderate depreciations in emerging currencies and, to a lesser extent, in the euro against the dollar.

Key points

• Key points:
• In particular, the U.S. dollar has shown remarkable strength, driven by resilient economic growth and persistent inflation that has kept interest rates high for longer.
• The Federal Reserve (Fed) had paved the way to start reducing interest rates at the end of the first half of this year; however, it was forced to reconsider its decision when the economy accelerated again, and the disinflation process came to a halt.
• In April, the euro/dollar pair hit a yearly low of 1.06 largely due to the divergent outlook for monetary policy in the United States and the eurozone. Markets anticipated fewer Fed rate cuts this year, while the European Central Bank (ECB) led the way in initiating cuts.
• Emerging currencies have shown resilience, largely due to central banks being more cautious in their monetary easing cycles, and favorable interest rate differentials with the United States kept carry trade going. In the remainder of the year, these interest rate carry trade operations are expected to remain attractive to emerging currency investors due to the still significant rate differentials and on the assumption of low volatility.
• For the euro/dollar pair, challenging months are expected in the remainder of the year. The policies of both central banks will continue to be a determining factor. Following the July meetings, the ECB is expected to continue a gradual downward cycle over the next year and a half, with a somewhat more aggressive cycle from the Fed. Investors could start pricing this in as early as this year, which would support the euro.

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