U.S. dollar troubles not over yet, but 2018 to be a
better year
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[January 05, 2018]
By Hari Kishan
(Reuters) - A rough patch for the U.S.
dollar, which just recorded its worst annual performance in 14 years, is
forecast to ease in 2018 but is not over yet, according to a majority of
foreign exchange analysts in a Reuters poll.
The greenback started last year on a strong footing, underpinned by
newly-elected President Donald Trump's promises to cut taxes and spend a
trillion dollars on infrastructure. However, the currency fell 10
percent by end-year.
Most currency strategists did not foresee that, with predictions made
this time last year for dollar appreciation ending up among the most
inaccurate start-of-year forecasts for the ensuing 12 months since the
financial crisis nearly a decade ago.
At one point in December the dollar did pop up more than two percent as
speculators bet Congress would deliver legislation for sweeping tax cuts
to corporations and individuals, which was delivered at the end of the
year.
Still, the path of least resistance for the dollar is down. The euro and
other major currencies are expected to make further modest gains against
the dollar by year-end, according to a Reuters poll of 70 foreign
exchange analysts taken Jan 2-4.
"The dollar is going to remain on a downward trajectory through the
course of the next year," said Jeremy Stretch, head of G10 FX strategy
at CIBC Capital Markets.
"We have a market which is already discounting additional Fed tightening
and the tax measures and fiscal expansion are only going to be
moderately stimulatory to the economy."
Stretch, like other analysts, is concerned about the more than 1
trillion dollars of extra borrowing over the next decade to fund the tax
cuts, but does not think that is set to put direct downward pressure on
the dollar at this point.
"The fiscal story is important, but it's what's happening elsewhere in
central bank terms I think (that is) probably more dynamic," he said.
But with the Federal Reserve widely expected to deliver three interest
rate increases this year, any big shift in the dollar in either
direction would have to come from a significant deviation from that set
path.
"Even if the Fed does deliver the three hikes which they are currently
planning, we just don't think it will be enough to reverse the dollar
weakening trend which is currently in place," said Lee Hardman, currency
economist at MUFG.
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A money changer holds U.S. dollar bills at a street in downtown
Lima, Peru, December 15, 2017. REUTERS/Mariana Bazo
For now, with inflation pressures still tame, the outlook for bond
yields in a December Reuters poll of fixed-income strategists showed
most of them sanguine, too, expecting only about 50 basis points more
added to the 10-year note this year.
STILL A BETTER YEAR
Asked how they expected the dollar to fare against major currencies this
year, a majority of the forecasters in the latest Reuters poll said it
would perform better than last year - not a hard thing to do given how
bad last year was.
Currency speculators have trimmed their net short dollar bets to their
lowest since November, according to the latest data from the Commodity
Futures Trading Commission for the final week of last year.
The euro <EUR=>, which also had its best run since 2003 last year, is
forecast to weaken slightly over the next three to six months before
moving up to trade slightly higher at $1.210 in a year's time, up
slightly from where it is now.
The euro zone economy is having one of its best runs since the single
currency was launched, outperforming its peers. It is forecast to
continue to grow at a robust pace.
With the European Central Bank expected to put an end to its
quantitative easing program this year, the risk is that the euro
performs even better than currently predicted.
"We think the ECB will bring QE to an end this year and then also start
to soften their forward guidance over the first rate hike, which could
bring expectations of a first rate hike into focus later this year and
add additional momentum to the euro," said Hardman.
(Polling by Indradip Ghosh and Shrutee Sarkar; Editing by Ross Finley
and Chizu Nomiyama, Larry King)
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