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| Which currency will reign supreme in 2024? The Euro has not yet reassured investors, the new currency is considered attractive and stable. Illustration photo. (Source: Preppik) |
The euro may strengthen against the dollar, but the European Central Bank's monetary policy could cause volatility. The Norwegian krone is seen as attractive. The Swiss franc remains highly stable. The Japanese yen remains weak.
In its analysis of the outlook for currency investment in 2024, the Düsseldorf-based economic newspaper Handelsblatt (Germany) presents the opinions of foreign exchange strategists and their expectations for the Euro and the USD in 2024.
Controversial instability
The euro has been controversial throughout its 25-year history, but it is widely regarded as a success and a guarantee of stability. It caused much tension when it was launched in early 1999, with critics questioning its structure because it is difficult for a central bank to keep a common currency stable for so many countries.
During the 2010 euro debt crisis, tensions in the system erupted as markets doubted the Greek government 's ability to repay its debts, but the heavily indebted country ultimately stayed in the monetary union, to keep it from collapsing.
Despite all the criticism, the currency is still considered a success story. Analysts at Commerzbank note that inflation has averaged 2.1% since the beginning of the year, close to the ECB's target.
While the currency has lost overall value against the dollar since 2008, it has gained value against other currencies such as the British pound and the Japanese yen in recent years, said Stefan Grothaus, a foreign exchange analyst at DZ Bank.
Over the past year, the euro has appreciated 3% against the dollar, most recently to around $1.10 per euro. So after a quarter of a century, the expert verdict is that the euro is stable.
However, Ulrich Leuchtmann, head of foreign exchange research at Commerzbank, admitted that the common currency is far behind the US dollar in terms of international stature and that will not change in the near future.
Ulrich Stephan, head of investment strategy for private and corporate clients at Deutsche Bank, believes the euro-dollar exchange rate will remain little changed throughout the year. He predicts: “The euro/dollar exchange rate will fluctuate moderately at $1.10 per euro by the end of 2024.”
Geopolitical crises, on the other hand, can be volatile because when investors are fearful, they often take refuge in the US dollar - the currency of the world's largest asset managers. Commerzbank's Leuchtmann warned of increased exchange rate volatility next year: "The global interest rate hike cycle that is now coming to an end is a great example of how interest rate volatility can influence exchange rate volatility."
Interest rates around the world were very low and largely unchanged until early 2022, so there were no major shifts between individual currency areas. There have been significant fluctuations since then as central banks have stepped up intervention due to high inflation.
Volatility peaks in mid-2022 and then declines as interest rate hikes end. From this model, Mr. Leuchtmann deduces that volatility will increase sharply again in 2024 because central banks such as the US Federal Reserve (Fed) and the ECB are likely to cut interest rates significantly, but not in unison, so there will always be a difference in interest rates.
Stable but not exciting
Expectations of central banks easing monetary policy could cause volatility in foreign exchange markets, with recent warnings that stocks and bond markets are relying too much on rapid rate cuts.
The Swiss franc is popular with German investors because it typically does not offer high interest rates, but is traditionally seen as a safe haven. This has been confirmed in 2023, when the franc rose about 6% against the euro, Deutsche Bank's Stephan noted.
The Swiss National Bank (SNB) has been selling foreign currency on a large scale to support the franc, making imports cheaper and fighting inflation. However, that support may no longer be available as inflation has fallen significantly to 1.4%, predict Stephan and Dorothea Huttanus of DZ Bank. As a result, analysts rate the franc as “unattractive” over the next 12 months.
Attractive, profitable currency
Hartmut Preiß of DZ Bank, on the other hand, sees the Norwegian krone as “attractive.” Norway’s central bank raised its key interest rate to 4.5% in December 2023 – and it expects it to stay there for longer. Higher interest rates make investing in the Norwegian krone more profitable. So if investors increase their demand for the krone, the currency will strengthen.
According to Institutional Investor , the Norwegian krone is often seen as playing a role in the "play" of oil prices, given that the country is the largest producer in Western Europe - and by extension, the "play" of the changing outlook for global economic growth.
Recently, however, a new reason to buy the krone has emerged. At a time when central banks across Europe are trying to find clever ways to ease monetary policy further despite rock-bottom benchmark interest rates, Norges Bank has signaled that it will raise interest rates – thereby boosting the interest earned on krone bonds and deposits.
Meanwhile, the outlook for the Japanese yen, which has sometimes been viewed by markets as a safe haven in times of crisis, has been undermined by Japan’s prolonged ultra-low interest rates, with the Bank of Japan (BoJ) holding its key interest rate at -0.1% through December 2023.
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