USD surging against JPY, AUD, and more

Key points

• US dollar has strengthened in 2024 across major pairs
• Japanese yen and Australian dollar have particularly struggled against USD, partly due to a slowing Chinese economy
• US inflation and strong employment data have weakened certainty of coming interest rate cuts

As we delve into the dynamic landscape of the foreign exchange market at the outset of 2024, traders have witnessed a remarkable surge in the value of the US dollar (USD) against major currencies, particularly the Japanese yen (JPY) and the Australian dollar (AUD). This unexpected momentum in USD has challenged the prevailing narrative that the dollar was set to weaken with potential rate cuts by the US Federal Reserve and a potential shift in Japan's monetary policy.

US dollar in 2024

The end of 2023 painted a picture of a bearish dollar, with USD/JPY plummeting from levels above 150.00 to the 142.00 mark, and whispers of the Bank of Japan (BoJ) moving away from negative interest rates. However, as we stepped into 2024, these assumptions were swiftly unraveled. The USD has climbed over 4% against the yen, a significant move of more than 500 pips in just a few weeks. The BoJ appears to have retracted its hawkish stance due to domestic economic factors, and the anticipated convergence of US and Japanese monetary policies has not materialized as expected.

Similarly, the Australian dollar, which had recovered impressively from its October lows, trading from around 0.6300 to above 0.6800, has now relinquished much of its gains, hovering around 0.6600. The proximity of AUD to its previous lows around 0.6300 suggests that further downside is plausible, with US dollar already appreciating roughly 100 pips against AUD at the start of this week alone.

Why is the dollar strengthening?

The newfound strength of USD is partly attributable to recent robust economic indicators, with non-farm payrolls surpassing expectations and inflation rates hovering closer to 4% than the Fed's 2% target. Although inflation remains above desired levels, it is significantly lower than the peaks experienced in the past two years, indicating a strong US economy that is outperforming its peers.

Contrastingly, the Chinese economy is facing headwinds, as evidenced by the performance of the iShares China Large-Cap ETF (FXI), which has plunged to its lowest levels in nearly two decades. The negative correlation between Chinese stocks and USD has been pronounced since the pandemic, with China's economic recovery lagging behind that of the US.

This divergence in economic fortunes has a ripple effect on economies closely tied to China, such as Australia and Japan, whose currencies have weakened against the US dollar. Approximately 32.2% of Australia's trade is with China, making the health of the Chinese economy a significant factor for the Australian dollar's performance.

While the end of 2023 suggested a weakening dollar, the early weeks of 2024 have painted a different picture. The US dollar's resurgence, despite the global dovish environment, serves as a reminder that market predictions are not certainties. The strength of USD, anchored by solid US data and shifting rate expectations, has defied bearish forecasts, reinforcing the importance of staying attuned to market signals and economic indicators in your trading strategies.

How to trade US dollar

1. Open an account to get started, or practice on a demo account
2. Choose your forex trading platform
3. Open, monitor, and close positions on USD pairs

Trading forex requires an account with a forex broker like IG. Many traders watch major forex pairs like GBP/USD and USD/JPY for potential opportunities based on economic events such as inflation releases or interest rate decisions. Economic events can produce more volatility for forex pairs, which can mean greater potential profits and losses as risks can increase at these times.

You can help develop your forex trading strategies using resources like IG’s YouTube channel. Our curated playlists can help you stay up to date on current markets and understanding key terms. Once your strategy is developed, you can follow the above steps to opening an account and getting started trading forex.

Your profit or loss is calculated according to your full position size. Leverage will magnify both your profits and losses. It’s important to manage your risks carefully as losses can exceed your deposit. Ensure you understand the risks and benefits associated with trading leveraged products before you start trading with them. Trade using money you’re comfortable losing.