Outlook for the USD in 2019 – Introduction
This year, the dollar has had a great run, with the dollar index rising from a YTD low of 88 to a high of almost 98. This is a more than 10% increase. The rise in the dollar was as a result of a number of reasons. First, the US economy remains quite robust. In the second quarter, the economy expanded by 4.2 and slowed down to 3.4% in the third quarter. In the fourth quarter, the economy is expected to rise by 2.4%. While all this shows some slowdown in growth, it is still above average.
Second, the Federal Reserve has continued to increase interest rates. This year, the bank has increased rates by four times and is expected to raise two times in the coming year. In all speeches and press conferences, Fed’s Jerome Powell has continued to sound hawkish. Last week, the Fed sounded dovish for the first time this year. In the press conference, the Fed chair said that the rate increases might reduce. Fed’s John Williams said that the Fed’s thinking could change as economic environment change.
Third, the other countries have not been doing well either. Europe, the second biggest global economy has been in trouble with slowing growth. Emmanuel Macron’s popularity has reduced significantly and in Italy, the leaders have crashed with the European Union. Japan on the other hand has seen some growth but inflation has continued to be subdued. China at the same time has continued to see slowed growth even as the United States continues the pressure campaign. The same is true with the other emerging market countries. Therefore, as the other countries continue to experience slow growth, the United States has been a better place for investors.
Fourth, corporate earnings in the United States have been better than in other countries. This is mostly because of the improving US economy and the impacts of the tax reform package passed by the United States. This package also allowed companies to bring cash from outside the world to the United States, which helped improve the economy.
Therefore, the question is on what investors should expect for the dollar in the coming year. First, the Fed could slow down the interest rates in the new year. In last week’s monetary policy decision, the bank said that the rates would fall to two from four in 2018. This dovish hike was intended to help calm a market that has continued being worried about rate hikes. Therefore, with the Fed slowing hikes, the dollar could fall slightly as investors wait for the action of other central banks. European Central Bank (ECB) has said that it will stop the asset purchases later this week. It has said that it will likely hike in the coming year. If it does, it will help take the euro higher.
Second, I believe that fears of a slowed global growth have been exaggerated. This means that the slowdown that traders expect for the coming year will likely not happen. This will slightly be boosted by the low oil prices. Therefore, with all this, we can expect the dollar index to fall slightly before starting to ick up again.