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Dollar weakness is a conviction call for 2024 at Amundi, Europe's largest asset manager.

In a year-ahead outlook note, Amundi says the mild U.S. recession - a base case expectation for H1 2024 - may not be as positive for the USD as in the past.

Analysts say that barring a hard-landing scenario, worsening U.S. data should hurt the USD via two main channels:

i) reversal of U.S. exceptionalism (which becomes even more likely if Chinese growth stabilises)

ii) the Fed shifts focus to growth and enters a cutting cycle

"Entering 2024, should the USD continue to trade at a higher premium relative to fundamentals (that have dropped compared to last year), it will be vulnerable to pullbacks when moving from policy tightening to policy easing," says Amundi.

A more concerted Dollar decline might have already commenced following the Federal Reserve's December meeting, where it effectively condoned market bets that up to 150 basis points of interest rate cuts would fall in 2024.

In an apparent policy pivot, Fed Chair Jerome Powell said the risks of keeping interest rates restrictive for too long was a risk.

This suggests the Fed has already shifted its focus to growth, one of the two channels to USD weakness Amundi says is required for USD weakness in the coming year.

Amundi forecasts Euro-Dollar at 1.09 by mid-year, in line with the consensus forecast of 1.09, ahead of 1.15 by the end of 2024, which puts them above consensus at 1.11.

The exchange rate is at 1.0980 at the time of writing, with the December European Central Bank policy update providing a boost.

Amundi also says the prospects for Japanese Yen strength are brighter, as expected policy normalisation at the Bank of Japan is "good news".

Amundi says the Yen is the best hedge for hard-landing risk.

Emerging Market currencies vs USD seem oversold and are now extremely cheap, according to Amundi, which is constructive for the asset class in 2024

Meanwhile, CEE countries will benefit from strong undervaluation and ties to the Euro, which is expected to strengthen during the year.