Why the beaten-down dollar kicked off 2024 with its best day in 5 months

• The dollar started 2024 strongly, rising 0.8% on Tuesday for its best performance since late July.
• The rebound comes after a year where the greenback sank 3%.
• Investors' bets that the Fed will take a more cautious approach to cutting rates boosted the buck.

The dollar looked to leave a disappointing 2023 behind on the first trading day of the new year, as it notched its best performance in more than five months.

The US Dollar Index, which tracks the greenback's strength against a basket of six other currencies, including the euro and the Japanese yen, ended Tuesday up 0.8% – the biggest rise over a 24-hour period since July 27.

The gauge was one of the few Wall Street benchmarks to finish the day better off, with Apple's $100 billion wipeout dragging down both the S&P 500 and the Nasdaq Composite and yields on 10-year US Treasurys ticking up 8 basis points.

The buck's strong start to the year could be a sign that investors have turned more cautious on both interest rates and the health of the world economy ahead of key data releases this week, according to analysts.

"Caution has returned, as investors have begun to reassess the prospects for interest rates and just how resilient economies will be over the months to come," said Hargreaves Lansdown's Susannah Streeter.

The dollar's gains Tuesday came after losing 3% last year as investors bet that the Federal Reserve will start slashing interest rates in 2024. Currencies often struggle when borrowing costs fall because they become less attractive to foreign investors seeking higher yields.

While chair Jerome Powell signaled last month that the central bank is done tightening, there's not much consensus on when it'll start cutting rates.

Wednesday's Fed minutes could offer investors more of clues – as could Friday's jobs report, which will help policymakers gauge how their war on inflation is affecting the labor market.