The US Dollar has underperformed this year and despite the recent increase, HXL expects the Dollar to weaken against the Euro and the Yen.
Even though the Federal Reserve has increased interest rates twice this year (and expected to increase rates again tomorrow), stronger economic growth and tighter monetary policy across Europe and emerging markets may cause the dollar to be sold off again. For 2018, we expect the euro to reach $1.30 against the dollar (an increase of 10.7%). The dollar is down 7% this year against world’s major currencies.
The major reason for the dollar underperforming is President Trump’s inability to implement his pro-growth election promises of lower taxes and increase infrastructure spending. Pessimism has spread to the markets, as there is the general opinion that Trump and the Republican Party are unable to make good on their promises. This is further emphasised by the Democratic candidate winning today’s special election for U.S. Senate seat of Alabama. This will reduce the Republican majority and make it harder for Trump to pass his legislative agenda next year. However, this will not affect the vote on the business-friendly tax cuts.
Even if the Federal Reserve raises rates, we believe that it is towards the end of its tightening cycle. Focus will now shift towards Europe and Asia for signs of economic growth. If there is an upturn in GDP across Europe, this may prompt the ECB to decrease its stimulus package and therefore register gains against the dollar.