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US Dollars

• The U.S. dollar's significant drop in 2024, driven by expectations of Federal Reserve interest rate cuts, impacted global economies.
• In Japan, the yen rebounded due to a rate hike by the Bank of Japan and looming Fed cuts, while China's yuan strengthened.
• The weaker dollar lifted emerging market currencies, particularly in Asia, and led to gains for the sterling and euro in Europe.
• The dollar's decline had implications for global markets, making commodities more affordable, benefiting emerging markets, and affecting trade dynamics.

The global financial landscape in 2024 has been marked by significant shifts, with the U.S. dollar experiencing its biggest monthly drop against other major currencies in August. This decline, which was primarily driven by expectations of the U.S. Federal Reserve cutting interest rates due to a weakening economy, has had far-reaching implications for economies worldwide. The U.S. dollar's downtrend, long anticipated by market observers, was a response to the weakening U.S. economy. The Federal Reserve's anticipated interest rate cuts were a significant factor in this trend.

The Impact on Japan and China

In Japan, traders had been bracing for intervention to prop up the yen, which had hit a 38-year low against the dollar. However, the yen's dramatic rebound put an end to such speculation. The yen's recovery was attributed to a combination of factors, including a rate hike by the Bank of Japan, looming Fed cuts, and a sharp reversal of popular carry trades. The dollar's decline also had implications for China. Earlier in the year, China had attempted to prevent its currency from weakening too much against the dollar, partly out of fear that this would drive capital outflows. However, with the yuan at its strongest since June 2023, authorities were now concerned that further strength could cause disruption.

Emerging Markets and European Currencies

The weaker dollar also lifted emerging market currencies, particularly in Asia. The Philippine peso chalked up its best monthly gains in August in some 18 years, and the Indonesian rupiah in more than four years. However, this momentum did not spread to Latin America, where Mexico's peso and much of the region suffered hefty losses due to domestic woes and wobbly commodity prices. In Europe, the sterling and the euro, which had fallen to record lows two years ago, were now the top-performing major currencies. The sterling was above $1.30, up over 25% since its record lows, and the euro was above $1.10, supported by markets pricing fewer European Central Bank and Bank of England rate cuts than for the Fed.

Implications for Global Markets and Economies

The shifts in the dollar's value and the anticipation of U.S. interest rate cuts had significant implications for global markets. A weaker dollar generally makes commodities, which are often priced in dollars, more affordable for buyers using other currencies. This can lead to an increase in demand and, consequently, higher commodity prices. This was particularly beneficial for countries that are net importers of commodities, as it reduced their import costs. The depreciation of the dollar often benefits emerging markets in several ways. It makes their exports more competitive in global markets, which can boost their export sectors. Additionally, a weaker dollar can lead to capital inflows into emerging markets as investors seek higher returns in these markets, now that their currencies are stronger relative to the dollar. This can lead to stock market gains and increased investment in these economies.