Brett Thomas, Head of Dealing at Godi, takes a look at the underlying cause for the recent dollar weakness.
The US Dollar has endured a pretty wretched start to 2018, continuing a trend of Dollar weakness that started in early 2017. All this despite the fact the US economy is still growing at a healthy pace, the Federal Reserve look set to hike rates three times in 2018, and many expect President Trump’s flagship Tax cuts to add further momentum to the US economy.
Yesterday in fact saw the Euro trade to a fresh 3-year high of 1.2296 against the Dollar, whilst Sterling hit a post-referendum high of 1.3819, both representing a gain of approximately 2.4%.
So what is the underlying cause for the Dollar weakness? Well there are number of factors conspiring to drive this current bout of weakness; however in some instances the weakness may be down to the relative strength of the opposing currency.
The Eurozone Recovery
The Euro is a prime example of a currency that has strengthened relative to the Dollar, perhaps more so than the Dollar weakening. The Euro was one of the best performing majors in 2017 and that has continued into 2018, underpinned by a resurgent economy and continuing optimism for future growth prospects. Suggestions that the ECB could unwind their unprecedented QE program by September and speculation that they could even hike rates before the end of the year have further strengthened the single currency. The Euro has also been bolstered by the prospect of a German ‘Grand Coalition’ Government being formed between Angela Merkel’s CDU party and the SPD, led by Martin Schulz.
To state the obvious, President Trumps’ short time in office has completely shaken up the political establishment both in the US and across the Globe. Yet despite the controversy that consistently follows the President around, the US economy has continued to thrive and prosper with a further three rate hikes pencilled in for 2018. The Dollar should, in theory at least then, be flourishing along with it. The fact that it’s not would suggest that political issues are indeed having a negative impact on the Dollar. And with the ongoing chaos and discontent in Washington DC, the threat of the US withdrawing from NAFTA, and President Trump’s leadership continually being called into question, there should be no real surprise that it’s not.
The dreaded ‘B’ word strikes again! Sadly however, it is likely any piece involving Sterling currency pairs written in the next few years will be dominated by Brexit. As touched upon earlier GBP/USD rallied to a pre-referendum high of 1.3819 with the move attributed to renewed hopes of a ‘softer Brexit’. Reports have suggested the Spanish and Dutch Finance Ministers held meetings and are in agreement that a deal for the UK that keeps things as close to the status-quo as possible would be in their best interests. The extent to which Sterling has strengthened has however been muted against some of its other major currency counterparts, most notably against the Euro, which would suggest in this instance that the Dollar’s weakness has been the main driver of the currency pairs rise.
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