What will happen to the yen in 2024?

The US dollar has not have moved at all this year in trade-weighted terms. In fact, the US dollar looks as if it will end the year slightly lower than where it started against other major currencies on the DXY index. Despite this, there’s still been a perception that the US dollar has been strong; but that’s because it has rallied significantly against the yen – as have other currencies. Next year could see similar stability but, this time with the yen rallying against the US dollar and other major currencies.

2023 has been a boring year for the US dollar, outside of the yen. Against the euro, for instance, it has rarely been outside of a 1.05-1.10 range and, if it finishes the year close to current levels will have actually fallen slightly against the euro given that euro/dollar was 1.07 at the end of 2022. Things are no different if we look at the US dollar’s broad trade-weighted index that takes in emerging markets as well.

For instance, the BIS’s measure of the US dollar’s broad trade-weighted index is also flat on the year and that gives big weights to the likes of the renminbi (23%) and Mexican peso (13.6%). So, the story of 2023 has not been US dollar volatility. Instead, it has been yen volatility as the currency has sunk against other developed currencies. The reason for this appears easy to see as the Bank of Japan refused to follow the monetary tightening undertaken by other central banks which stretches back to 2021 in some cases.

In 2024, the BoJ seems likely to start the process of lifting policy rates and if we assume that most other G10 central banks start to cut, there’s a good chance that the yen will recapture the ground lost through 2023 and possibly more. For instance, the Standard Bank puts US dollar/yen at 125 at the end of 2024; a drop of over 10% from current levels and considerably lower than the median forecast of 136 in the Bloomberg survey. But what happens to other currencies if this takes place? Will euro/dollar stay glued to a 1.05-1.10 range?

In the Standard Bank’s view, the interesting thing about 2023 is that the US dollar did not strengthen against the euro and many other currencies – given the way economic developments have turned out. For a start, there’s been no US recession as many anticipated at the start of the year. Admittedly, other G10 countries have generally avoided recession as well but the difference is that many are very weak, especially in Europe with winter recessions now looking very likely. In contrast, US growth should be north of 2% this year. And it is not as if this US outperformance has escaped the bond market.

For instance, if we look at real 10-year yields in the US and Germany, with inflation proxied by forward-starting inflation swaps, the US has seen its advantage rise by as much as one percentage point through the course of this year. It seems to us that those anticipating a stronger dollar against the euro and other currencies next year are basing it on things such as US ‘exceptionalism’ and the fact that rates might fall in other countries relative to the US as the ECB and others cut rates first.

>> What is the outlook for the US dollar/yen?

But if 2023 did not see the dollar rise despite clear US exceptionalism and a relative rise in US yields, it is hard to see how 2024 can produce a different outcome for the US dollar if the same things happen. Does this mean that the US dollar is bound to weaken? Not necessarily. The key in the Standard Bank’s opinion is asset prices. For as we have argued before, rising asset prices are more often associated with a weaker US dollar, just as we’ve seen over the past month or two. Asset prices had quite a good year in 2023 and we feel that this acted as a counterweight to US exceptionalism. It could happen again in 2024 and, if it does, it hints that the year could, indeed, turn out like 2023 in the sense that the dollar is broadly stable in trade-weighted terms with all the volatility compressed into dollar/yen as the Japanese currency recovers against the dollar – and other currencies.

“We might hope that euro/dollar is a bit more volatile that the dull 1.05-1.10 range we saw for much of 2023. We think this is possible as our bias is for a lower dollar, towards 1.20 on the basis that global policy easing will produce sufficiently positive momentum for asset prices to outshine any remaining US exceptionalism that is thought to exist”, said the Standard Bank.