The Greenback Dipped but Remains on Track for Its Strongest Weekly Performance in a Month
The US dollar dipped on Friday, but it is on track for its strongest weekly performance in a month, driven by expectations that the US economy will continue to outperform its peers globally and that US interest rates will remain relatively higher.
A Solid Labour Market and High Inflation Lift Treasury Yields
A still solid labour market and stubbornly high inflation have lifted Treasury yields in recent weeks and boosted demand for the US currency. New policies under the incoming Donald Trump administration, including business deregulation, tax cuts, curbs on illegal immigration and tariffs, are also expected to boost growth and add to price pressures.
Uncertainty Over New Policies May Pause the Dollar Rally
Despite recent dollar gains, there remains considerable uncertainty over when policies will be introduced by the new US government, and what their ultimate impact will be. That could pause the dollar rally in the near term.
FX Trader’s View
"We are likely to see a bit of a dollar pullback as the administration comes in because all these proposed tariffs – they are going to take some time to implement and we don’t actually know if all of these proposals are going to be implemented or not," said Helen Given, FX trader at Monex USA in Washington.
Forecast for the Second Half of 2017
"As we move through the second half of this calendar year I think we are going to see some more dollar strength," Given said.
Other Currencies
The euro faces a weaker growth outlook and may be hurt by US tariffs, with the European Central Bank (ECB) expected to cut rates further than the Federal Reserve this year.
European Central Bank’s Rate Cuts
Traders are pricing in 100-basis-point rate cuts by the ECB by year end, and only a less than certain chance of 50 basis points of cuts by the Fed.
Uncertainties Weighing on the Euro
Uncertainties including the French budget battle and German elections are also weighing on the single currency.
Cryptocurrencies
In cryptocurrencies, Bitcoin gained 1.59% to $98,658.
Conclusion
The US dollar is expected to remain strong in the coming weeks, driven by expectations of economic growth and interest rate increases. However, uncertainties surrounding new policies and their implementation may pause the dollar rally in the near term.
FAQs
- What is driving the dollar’s strength?
- A still solid labour market and stubbornly high inflation have lifted Treasury yields in recent weeks and boosted demand for the US currency.
- What are the expectations for the new US government’s policies?
- New policies under the incoming Donald Trump administration, including business deregulation, tax cuts, curbs on illegal immigration and tariffs, are expected to boost growth and add to price pressures.
- What is the outlook for the euro?
- The euro faces a weaker growth outlook and may be hurt by US tariffs, with the European Central Bank (ECB) expected to cut rates further than the Federal Reserve this year.
- What is the forecast for the second half of 2017?
- "As we move through the second half of this calendar year I think we are going to see some more dollar strength," said Helen Given, FX trader at Monex USA in Washington.
