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[TSP_Strategy] US Dollar in 2018

 

The U.S. Dollar In 2018: An Underlying Weakness

Dec. 21, 2017 1:36 PM ET

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John M. Mason

Summary

2017 was not a good year for the US dollar, although people believed at the start of the year that the opposite would occur.

However, economic conditions were not seen as the cause of the decline in the value of the US dollar as political considerations appeared to dominate the scene.

It seems as if the market is now looking for reasons for the US dollar to decline, and this will create an underlying softness in the market throughout 2018.

Looking forward to 2018, my impression is that the market favors US dollar weakness and will find any reason it can for moving the value of the US dollar lower. This is just the opposite of what the situation was in 2016. During much of the year, it seemed to me that traders leaned on any reason for dollar strength to bid the value of the US dollar up.

In 2016, the leadership in the United States seemed to be in favor of a strong economy, and a strong US dollar and the Federal Reserve seemed to be paying attention to the value of the US dollar in its deliberations, and Fed officials seemed to favor a stronger dollar.

Traders were in favor of this policy stance and therefore tended to support the stronger US dollar every time the news seemed to be consistent with this viewpoint.

On December 20, 2016, the value of the US dollar reached a near-term peak. The Trade Weighted US Dollar Index information produced by the Federal Reserve System supported this strength. The Broad index stood at 128.3122 on that date, and the index against major currencies was 96.4316. The US dollar Index (DXY) published by the Wall Street Journal was at 103.28.

Looking specifically at the US dollar/euro exchange, it took only $1.0387 to purchase one euro on that date, and, as mentioned above, the talk was that there would soon be a dollar/euro parity reached soon.

Well, those days are gone. As of December 21, 2017, it took $1.1900 to buy one euro, a decline in the value of the US dollar of 12.7 percent.

The Federal Reserve's Broad index fell by 6.3 percent to a level of 120.2174, and the Major Currencies index dropped by 7.6 percent to 89.1218. The US dollar index of the Wall Street Journal declined by 9.7 percent to 93.26 during this same time period.

The year 2017 was not a good year for the US dollar.

What happened?

Well, for one, the United States President spent some time talking down the value of the dollar. He wanted to achieve a better balance in US foreign trade, and he also wanted the US economy to grow faster. Both of these things, he believed, could be achieved with a weaker value of the currency.

Furthermore, he wanted the US to pull back from multinational trade agreements, threatened greater amounts of protectionist legislation, and backed out or threatened to back out of existing trade deals or trade discussions. He also pulled out of the Paris climate talks.

And, Mr. Trump's positions on China, North Korea, the Middle East, and Europe alienated many and forced countries to consider whether or not they should step up in world discussions to take the leadership position that was seemingly being vacated by the United States.

China, in particular, enlarged its role in world trade, climate change, and foreign affairs.

The value of the US dollar especially took a nose-dive against the euro when Emmanuel Macron became the president of France and immediately began to reform his country and establish closer ties with German Chancellor Angela Merkel to strengthen the European Union and Europe's position in the world.

It seems as if the environment for the US dollar changed in 2017, but it had little to do with pure economic factors. As the United States appeared to step back from world leadership in many areas, people seemed to step back from the US dollar. Political factors seemed to dominate a lot of the changes that took place.

Moving into 2018, Roger Blitz of the Financial Times argues that "Dollar Bulls Harder to Find as 2018 Nears."

Basically, the strong points to support a strengthening of the US dollar have lessened in recent years. Mr. Blitz even quotes one analyst who believes that "examining the dollar back to the start of its rally in 2014 suggests the currency is still somewhat overvalued. While some of that overvaluation was corrected this year, the dollar still looks pricy against the Euro, sterling and the yen."

In addition, "the best that can be said for US tax reform is that its offers a mild upside in terms of economic growth." Nothing much here.

The prospect of monetary tightening on the part of the European Central Bank is present and "offers a clear trigger for further Euro momentum."

And positive focus seems to be more on non-US central banks in terms of relative changes in their monetary policies. "Decoupling between the dollar and the interest rate market is a sign that the Fed tightening cycle has matured."

In other words, there appears to be very little positive in the way of supporting a rise in the value of the US dollar. And, there is still the political environment to deal with.

As was exhibited in the vote in the United Nations on Thursday about the US position on Jerusalem, many nations are not afraid to move away from the United States these days, and this means that the political cloud over the value of the dollar will probably get worse, not better.

Mr. Blitz even quotes one analyst as saying that there is no reason why the value of the dollar against the euro cannot drop to as low as $1.30 to $1.35 by the end of 2018.

That value I believe might be considered an outside value for the year. I tend to believe that it is more likely that the value of the dollar will be more in the range of $1.23 to $1.28 than the higher number.

The important fact to me, however, is that traders will be looking more for the value of the dollar to drop and will therefore tend to move with negative news more than with any positive news that might be forthcoming.

The bottom line is that the rest of the world is seeing the United States as weaker in the world now than it perceived it to be in 2016. As such, there has been a substantial turnaround in global perceptions of where the United States is. A weakening dollar just represents an explicit measure of this perception.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

 

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Neither the TSP Strategy group, nor individual members, are licensed or authorized to provide investment advice. Any statements made herein merely reflect the personal opinions of the individual group member. Please make your own investment decisions based upon your personal circumstances.

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