About two weeks ago someone wanted to know why is the dollar weak? I honestly didn’t explore the reasons. So, I just said “it could be a Trump administration thing, trade deficit, ballooning budget deficit and some other speculative factors”.
Rate rises by a central bank traditionally boost a currency. And the Federal Reserve has raised interest rates three times in 2017. The ICE dollar index which measures the dollar against a basket of six other currencies fell nearly 10% in 2017.
A big part of dollar’s decline in 2017 was the Euro’s strength. While the dollar has not reacted much to the passing of U.S. tax reform, theoretically it should boost the value of the dollar. The main factors that may have contributed to U.S. dollar weakness in 2017 include:
i. Acceleration of global growth with anaemic U.S. growth of 2%;
ii. Monetary policy stance of other key central bankers;
iii. Diminishing political risks in the Eurozone;
iv. Uncertainties of Trump administration policies on infrastructure, DACA, immigration and the like; and
v. Heightened geopolitical risk since Trump assumed office.
So the U.S. currency is set for another soft or “soggy’ year despite Federal Reserve’s tightening interest rate regime for up to four times in the next nine months. The U.S. has neither the current account surplus nor budget surplus to be a true safe haven. The Eurozone, on the other hand, has a huge current account surplus and the characteristics of a safe haven. So dollar weakness will stay for 2018 if it lifts value of foreign sales and profits for U.S. multinationals.
1. “The US dollar just had its worst year in more than a decade, and 2018 will bring more of the same” (https://qz.com)
2. “A weakening bias for the US dollar well in to 2018” (https://investors-corner.bnpparibas-am.com)