While still the world’s dominant currency, the US Dollar may be running out of steam.
Economic climate check
The US economy seems to be going from strength to strength. And since the Federal Reserve (Fed) began to tighten its monetary policy in December 2015, the greenback’s value has risen. The Dollar Index, a basket of peer currencies, has risen by more than 35 per cent since its lowest level of 70.70 in 2008.
However, the Fed’s monetary policy path has diverged from other central banks, undermining emerging markets’ confidence amid already-tightened global monetary conditions.
What is more, Brexit and the rise of populism in Europe, coupled with slowing growth, has offered the Bank of England (BoE) and European Central Bank (ECB) little incentive to begin raising interest rates.
Economic climate change
But the tide is starting to turn.
The US stock market, the country’s barometer of investor confidence and a proxy for global growth, was down by almost 10 per cent from its peak of 2,945. It had looked like US equities were almost immune to a spate of bad news, but this is no longer the case.
Fed Chair Jerome Powell and other members have recently changed their rhetoric regarding their future interest rate strategy. Some market participants have suggested the Fed could begin to decelerate its tightening cycle or even end it altogether.
This raises questions about whether the Fed will increase rates in December or not. While a hike is still highly likely, the focus is now more on what to expect in 2019.
If economic data keep improving or remain robust, the Fed will continue to raise rates as planned, which will support the Dollar. But leading housing and employment indicators suggest global economic growth may be cooling.
In addition, positive Brexit headlines and continued monetary policy tightening by the ECB and BoE in 2019 will weaken the Dollar. Last year was characterised with ultra-low volatility, but I expect to see the opposite in 2019.
Fed still optimistic about US economy
US GDP data likely to boost Dollar further
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