(Bloomberg) -- The dollar closed out its worst year since the onset of the pandemic as Wall Street ramped up bets that the Federal Reserve is set to lower interest rates in 2024.

After being whipsawed by false starts calling for the end of the Fed’s rate hiking regime, a Bloomberg gauge of the greenback tumbled 2.7% this year in the steepest annual drop for the US currency since 2020.

Much of the decline materialized in the fourth quarter on growing wagers that the Fed will loosen policy next year as the US economy slows. That dents the dollar’s appeal as other central banks may keep their rates higher for longer.

Swaps traders are now factoring in Fed rate cuts of at least 150 basis points, with the first coming as soon as March. That’s up from less than 100 basis points in mid-November and double what policymakers penciled in at their most recent meeting. Among speculative traders, dollar positioning has become all the more bearish since the Fed’s December meeting. 

Read more: Shorting the Dollar Is Gaining Favor After Fed’s Great Pivot

“Markets are positioned for this ‘Goldilocks’ scenario where the Fed will cut rates enough to stimulate the economy without reigniting inflation pressures,” said Amanda Sundstrom, a fixed income and foreign-exchange strategist at SEB AB in Stockholm. “That’s driving the dollar performance.” 

Sundstrom added that the softer dollar is likely to persist in 2024 as US data weaken, but not enough to spur a risk-off bid for haven assets such as the greenback. 

Still, the dollar’s recent losses suggest there’s room for at least a temporary rebound. The Bloomberg Dollar Spot Index’s 14-day relative strength index recently traded below 30, a signal to some that the currency is now oversold and primed for a reversal.

Looking out further, the dollar may move in the leadup to the US presidential election in November, according to Koji Fukaya, a fellow at Market Risk Advisory Co. in Tokyo. In particular, Donald Trump’s presence as a candidate could cause political turmoil and inject volatility into the currency, he said.

The Bloomberg dollar gauge held steady on Friday in the last trading day of the year, while Treasuries ended a holiday-shortened session mixed. 

The dollar’s decline stands in contrast to the pound, which capped its best year since 2017, and the franc, which recorded its strongest annual performance since 2010. 

Sterling rallied 5.4% against the dollar in 2023, the biggest gain since the UK currency strengthened 9.5% in 2017. 

In Switzerland, the franc surged to record trade-weighted highs as traders increasingly expect the Swiss National Bank to hold policy tighter relative to its counterparts, even after a relatively dovish meeting on Dec. 14. 

Still, policymakers’ stance on the currency changed recently, with President Thomas Jordan saying this month that interventions could now go in both directions. Data released Friday showed that the SNB slightly reduced its sales of foreign exchange — and buying of its own currency — in the third quarter. 

“If I had to pick a central bank most likely to intervene to push down their currency next year it would be the SNB,” said Geoffrey Yu, a currency and macro strategist at BNY Mellon in London. As for the pound, “I won’t chase it aggressively until we get BOE clarity,” he said.

--With assistance from Robert Fullem, Anya Andrianova, Masaki Kondo, Joanna Ossinger, Alice Gledhill and Aline Oyamada.

(Updates language and charts throughout to reflect year-end close. An earlier version of the story was corrected to amend the spelling of an analyst’s name.)

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