This year has not been kind to the US dollar.
Measured against its main rivals, led by the euro, the dollar index has depreciated more than 9 per cent in 2017, and it is within sight of breaking down to a level last seen at the start of 2015. That represents quite a reversal, given how the dollar began 2017 at a 14-year high and the Federal Reserve has tightened overnight borrowing costs twice so far this year.
The dollar index has declined for five consecutive months, the longest losing streak since April 2011.
So can the dollar bounce or at least steady from here?
Despite a substantial interest-rate gap in favour of the US over Europe, UK and Japan, the dollar has slipped. This suggests that other forces are influencing sentiment, namely the political turmoil surrounding the Trump administration and lack of fiscal stimulus out of Washington.
Alan Ruskin at Deutsche Bank notes that “the market will probably continue to the view [of] the Trump administration as encouraging of US dollar weakness, at least while it is helpful for equities and growth’’.
Strong investor flows into Europe — whose economy has outperformed the US this year — on top of a region that already has a solid current account surplus, has certainly bolstered the euro at the expense of the dollar. Euro strength has yet to prompt a strong response from the European Central Bank, but currency strength has begun weighing on European exporters. In contrast, US multinationals are enjoying an earnings bounce from a weaker dollar.
Beyond the main currencies, the dollar has also notably fallen versus an array of emerging market units since January. That has made EM a hot ticket among investors this year, highlighting the importance of a benign dollar for the sector’s fortunes.
Declining US core inflation also supports a view that the current Fed tightening cycle is near an end, while investors are fixated on when the ECB will signal that hefty monetary easing has a shelf life.
Barring a technical bounce for an oversold dollar, the currency requires a catalyst to jump-start its fortunes. This brings us back to data and whether the US economy can show signs of acceleration and core inflation rebounds in the coming months.
Lee Hardman at MUFG says: “While the US dollar is lacking fundamental support, we would add some caution that the risk of a reversal in the near term is also high against most other G10 currencies. The stage is being set for a corrective rebound, but there is no obvious fundamental trigger yet.’’
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