Could the US dollar recover in 2018?
It’s no secret that 2017 represented the worst year for the US dollar in more than a decade. The dollar Index lost more than nine per cent over the course of 2017, resulting in the most difficult year for the major currency since the dollar declined over 14 per cent all the way back in 2003. It was such a problematic year for the dollar that pegged currencies like the UAE dirham felt the headwinds from the crumbling the US dollar.
So the question on the minds of many investors, is whether the Dollar could attempt a recovery in 2018. On one side, there is a valid argument that the current value of the dollar remains oversold. Of course, such a reality would be seen as good news for the dirham because an oversold currency from last year stands to potentially gain from investor appeal of a rebound this year.
This was the story for a variety of the South East Asian currencies in 2017, where many of the currencies that were heavily sold towards the end of 2016 mostly recovered over the following year. This was also the case with the British pound and euro, where they mostly recovered ground against the dollar in 2017, following a troublesome twelve months the year prior.
What does support appetite to- wards the US dollar, is that the US economy remains severely ahead of the pack when it comes to normalising monetary policy.
The Federal Reserve is the most hawkish central bank in the developed world, and will likely express an intention to the financial markets that it will raise US interest rates anywhere between 0.50 –100 basis points during 2018.
At a time where the likes of the European Central Bank (ECB) and Bank of Japan (BoJ) continue to be in no rush to raising respective interest rates, the US dollar offers yield to traders that many other developed currencies simply do not.
Progress in the jobs market, including ultra-low unemployment, is another tick for the dollar. Advancement in this sector should also improve consumer sentiment, while the recently announced tax cuts should also provide a hand to business conditions. When you combine all of this together, the ever-improving macro conditions in the United States should provide enough ammunition to provide some respite for the greenback after the tumble experienced last year.
The above provides an encouraging picture for the dirham to at least stabilize in 2018, but it is still important to monitor the outlook for other developed currencies across the world. The one currency where I do still see some risks of appreciation against the dollar is the British sterling, where the previous concerns of a “hard Brexit” had been priced in a long time ago. UK Prime Minister Theresa May by all accounts appears to be steering the United Kingdom towards a “soft Brexit” at this stage. Meaning, that investors could continue to be enticed towards pricing in a recovery for the British Pound in 2018, which would be a similar trend to what occurred during the latter part of 2017.
Although Brexit is still seen as undesirable for economic growth, the potential economic ramifications of the move to leave the European Union is not something that can really be judged until after the UK leaves the EU.
How the euro is likely to perform in 2018 is a tricky question to answer. There is still some political risk in Europe and after an appreciation above 10 per cent last year, pace of increased strength in the euro is likely to moderate against the Dollar in 2018. When it comes to the Japanese Yen, I feel its current level against the US dollar is still oversold.
Whether the Japanese yen will continue to weaken against the dollar and as such, the dirham in 2018, will likely depend on investor appetite towards the global stock markets. After all, it is the repeated record highs being seen in major global stock markets and subsequent risk appetite from investors that has been behind the Yen’s losses in recent months.
The question on the minds of many investors is whether the dollar could attempt a recovery in 2018