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2017 Dollar Dream Is Crumbling, Currency Falls Sharply Following More Disappointing Inflation Data

Oh dear. What a mess.

So much had been hoped for the US dollar in 2017 but how those mighty hopes have fallen.

The US dollar fell sharply on Friday, adding to what has already been a pretty horrible year for America’s currency. Of special note were USD/THB, USD/SGD, USD/AUD, USD/GBP, USD/CAD and the US Dollar Index, which all fell to long-term lows.

Analysts had been so positive early in the year, still buoyant following November and December’s post-US election dollar euphoria.

In February, even after the US dollar recorded its worst January performance in three decades, a Citi Bank analyst, Brent Donnelly, went as far as to describe a long dollar position early in the year as the “greatest FOMO [fear of missing out] trade of all time.” Donnelly added that “any hedge fund manager worth his salt is going to look really bad if he or she misses it.” He even suggested that some investment managers would be looking for new jobs if they weren’t long dollars when the Trump administration went on to implement the policies it had outlined at the time.

On the campaign trail, Trump had promised highly inflationary policies which included lower tax rates, deregulation and up to $1 trillion in infrastructure spending – policies that would have necessitated much higher US interest rates and consequently a much higher dollar, and these ideas fuelled dollar euphoria in the six-weeks following Trump’s election victory. To the dismay of many market forecasters, including Donnelly, six months after Trump’s inauguration, none of these policies have materialized.

R.I.P. the ‘Trump trade.’


Inflation Misses Expectations Again

When will forecasters learn?

On Friday, data released by the Bureau of Labor Statistics showed that for the fourth consecutive month analysts had overestimated US CPI growth. Inflation is clearly a problem in the world’s largest economy.

In June, headline inflation was non-existent with a print of 0.0% and so-called ‘core’ inflation, which excludes volatile food and energy prices, remained at just 0.1%. The market had expected prints of 0.1% and 0.2% for headline and core inflation respectively. Yesterday’s data means that annualized inflation in the US for all items is running at 1.6% and at 1.7% for core.

In recent months, the emergence of weak inflation data has cast the biggest shadow over the previously accepted trajectory of US interest rates. Above all else, interest rates are the prime driver of exchange rates and are set in the US by the country’s central bank, the Federal Reserve.

The Fed’s Chairwoman, Janet Yellen, was cautionary on inflation on Wednesday during her testimony to the US House Financial Services Committee. While she saw the Fed continuing with gradual rate hikes, she also told the House that “there is…uncertainty about when and how much inflation will respond to tightening resource utilization” and that “considerable uncertainty always attends the economic outlook.”

Following yesterday’s data, the probability indicated by Fed funds futures of the Fed hiking once again in 2017 fell to just 43%, and this sent the US dollar lower.


Exchange Rates

GBP/USD 3 Month Chart

GBP/USD finally broke cleanly above $1.30 following the CPI disappointment. Now at a ten-month high of $1.3102, sterling has completed a remarkable turnaround. In January the currency was trading in the high-$1.19s and has rallied nearly 10% since then.

USD/THB fell to ฿33.75 – a one-year high in the baht’s buying power.

The Singapore dollar is now at a nine-month high against its US counterpart. USD/SGD fell to S$1.3717.

The Australian dollar flew on Friday, crashing through the $0.7750 resistance level and rallying at one point to match April 2016’s high of $0.7835. AUD/USD closed at $0.7825 and has rallied in near-vertical fashion since Tuesday.

USD/CAD continues to collapse, fuelled by renewed hawkishness from the Bank of Canada, who raised interest rates on Wednesday for the first time since 2010, as well as by a stabilization of the oil price and, of course, the US inflation narrative. The pair is down more than 8% since May 5th.

EUR/USD failed to break above Wednesday’s high of $1.1489 but with a close of $1.1465 still looks likely to threaten the major $1.15 level next week.

The US Dollar Index (DXY) fell to a ten-month low of 95.11. The index is now down 7% on the year.


A Great Time to Make US Dollar Payments

With the dollar so cheap, now is a great time for making payments for US goods and for getting your hands on American currency for travelling.

Consider, for example, that a payment of $15,000 with today’s best value FX provider (CurrencyFair) will cost you just €13,176 (euros). As recently as January, this same payment might have cost you more than €14,500. That’s not only a saving of €1,324 due to movements in the exchange rate, but is also €652 less than you’ll be asked to pay by the FX service of a typical bank (today’s bank average is €13,828).

Readers can bypass the rip-off exchange rates on offer at many banks by always checking with BestExchangeRates’ online comparison calculators for USD foreign currency transfers and USD travel cash before changing money.

Please note that the opinions of our authors are their own and do not reflect the opinion of Best Exchange Rates and should not be taken as a reference to buy or sell any financial product.

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