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What Next for the US Dollar?

The US dollar is among the best performing currencies of 2018. In fact, ranked against twenty of the world’s most important currencies, the dollar beats all bar the Mexican peso, the Japanese yen, the Norwegian krone and Swiss franc. Traders are, however, pondering a recent dollar decline.

In mid-August, on a trade-weighted basis, the dollar had been worth 5.1 percent more than its beginning-of-year value. A significant dip since then has cut the year-to-date gain in half, to just 2.4 percent.

Why has the dollar been falling?

This is a conundrum because US data has been strong; in particular, US wage growth—long a source of concern for the Federal Reserve—has recently printed a nine-year high. Consider also US GDP growth which, at 2.9 percent, exceeds growth in the euro area, Canada and New Zealand, and is head and shoulders above growth in the United Kingdom and Japan. Steady rate hikes by the Federal Reserve and safe-haven flows caused by trade tensions should also be bolstering the value of US currency.

With all that said, the dollar weakened again on Monday—the seventeenth day in the past twenty-three that it has lost value.

Those shorting the dollar point to softer core inflation and believe that a trade deal of sorts will be struck by the US and China, and they pay greater attention to the US’ twin deficits.

Per Citibank, it is difficult to say whether the recent dollar dip is appropriate or not. The bank’s short and long-term views differ greatly.

“In the longer term, US dollar weakness may resume,” Citi’s FX team wrote on Monday.

“As fiscal cliff approaches in the second half of 2019, leaving the US with higher deficits, the US might start to lose its advantage against emerging markets.”

“Overall, our G10 forecasts show around 3-4 percent dollar upside over 6-12 months, followed by 11 percent downside in the long run.”

In the second half of August, ING discussed at length why they remain “strategically bearish on the US dollar,” with reasons centred around a White House agenda to weaken its currency.

“In a normal market environment, we think Trump jawboning [which includes criticism of the Fed and of higher interest rates] could weigh on the dollar.”

“If the short-term fundamental USD factors were to wane as well, then we think a clearout of long USD positioning could be worth a 5-7 percent decline in the trade-weighted USD index.”

For ABN Amro, “as long as there is turmoil in emerging markets and Italy and the Fed continues tightening its monetary policy . . . the US dollar will obviously continue outperforming. [However], such a rosy outlook carries the risk of negative US surprises.”

Holders of US currency seeking the most opportune timing for exchanging their money might do best by waiting for technical confirmation, which would include a more convincing break and close beyond the neckline of a recent head and shoulders pattern in the US Dollar Index, shown on the daily price chart above. Should that occur, technical trading rules would indicate a further 3 percent dollar decline within 1-2 months.

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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