In 2015, the United States Dollar played a very significant role in the financial market. For currency traders bullish on the dollar, this was the year for them. They made significant gains throughout the year. The weighted dollar index performed extremely well gaining double digits in all the major currencies including the Canadian dollar, Australian dollar and the Euro. As expected, the gain in the dollar had significant spill over effects to other asset classes. Most American companies with exposure to international markets suffered severely from currency associated losses. At the same time, commodities were hammered. Gold suffered one of its worst years since the financial crisis. The Bloomberg commodities index was also near the bottom.
The dollar strength in 2015 was as a result of the strengthening United States economy which grew marginally during the year. The economic data released during the period painted the picture of an economy that is recovering. Employment rate is increasing as is the case with wages. While the Fed’s inflation target of 2% was not reached, there are signs that with the tightening monetary policy and falling oil prices, it will ultimately be reached during the coming year.
In 2016, all focus will be on the dollar. Investors and traders will look at a number of issues which will determine how they will allocate capital to gain from any movements in the dollar. The main focus as was with 2015 will be the US economy. In this, investors will pay close attention to the key economic data such as those related to inflation, employment, and trade balance among others. An improving economy will lead to more fed intervention to hike interest rates. Today, investors are forecasting 4 hikes during the year. If this happens, chances are that the dollar will trade higher.
The United States data will not be the only key player in determining the dollar pricing this year. Other key global factors will play a significant role in all these. One, China will be a key factor to watch this year.
During the Fed’s September meeting, it was widely expected that they will hike interest rates. However, a month before the meeting happened, news came in that the Chinese economy was going through problems. The economy was weakening which led to intervention from the communist government. They devalued their currency, and they implemented serious measures in their stocks exchange. These measures worked. The main indexes recovered some of the losses and the Fed halted its normalization process. All eyes will now be fixed at the Chinese economy because what happens (good or bad) will have significant spill-over effects worldwide.
The emerging markets will also have major impacts on the dollar this year. Most emerging markets countries such as Brazil and Argentina are heavily reliant on commodities. This made 2015 their worst year since commodity prices bottomed. The impacts were enormous with many countries’ economies declining. This year, experts believe that there could be some recovery in these countries. For agricultural based economies such as Brazil, the engoing el-nino could see their commodities increase in price. This could help their currencies recover.
The question many investors and traders are asking is on whether the dollar has reached a ceiling or whether the continuing rise will continue. The truth is that nobody knows. However, it is expected that the above factors will be the key determinants of the dollar price. Actions of other central banks will also be key to the dollar. We have seen Bank of Japan governor Kuruda speculate that the bank will continue easing. The same has been the case with Bank of England governor, Mark Carney. This divergence will probably continue in the coming year which will further complicate the dollar situation. In summary, I anticipate that the dollar will continue its rise in the first half of the year.