What Will 2018 Bring for the Dollar
Fundamentals have not been supportive of the USD.
Without a doubt, fundamentals have not been supportive of the USD. Economically and politically speaking, the US has stumbled, particularly compared to the rest of the world. There have been very few reasons to buy the dollar other than the Fed’s tightening: The US is one of the few economies in a tightening mode, which should be US dollar-supportive.
Juliette Declercq, has been a strong advocate of the short-dollar trade this year. JDI is focused on macroeconomic fundamentals and the way these drive markets. Juliette detailed in ‘The Euro’s fortune wheel has now turned’ that in her view the Fed has already normalised:
I would go as far as to say that a Fed hike in December – or not – is largely irrelevant to the short USD trade…. my view on the USD relies on the relative business and monetary cycles between the US and the rest of the world. Monetary policy wise, the Fed has already “normalized.”
Juliette expects currency markets to start pricing in this shift in policies as the US becomes less isolated in its hawkish turn in monetary policy. Such a shift could mean that the USD bull market is over.
The twin deficits are worrying Greg Weldon. The US trade deficit is the deepest since May 2015, driven by higher imports, which weakens the dollar. The even greater threat is the declining fiscal situation, as the budget deficit could explode next year due to weakening tax receipts and rising debt service costs. These dual deficits will strengthen the headwinds for the USD:
US Budget deficit vs Dollar Index
Historically, rising budget deficits have negatively impacted the dollar…
Read more with Think Tank’s The Distillery.