The U.S. Dollar Will Remain Expensive

Summary

US dollar finished 2017 on a soft note after losing ground in the second half.

Dollar’s decline in 2017 was attributed to the euro’s strength.

Fed hikes expected to continue as tax reform support investment

Image source: Gainesville News

Investment Thesis

Investor concerns of a disinflation trigger in the US economy accompanied by lower-than-expected Fed rate increases contribute to a dim outlook and a weaker US dollar in 2018, according to some analysts. JP Morgan analysts initially thought that the US currency will pick up in early 2018. However, they changed their outlook after realizing the minimal gains in USD in response to the tax reform bill.

Despite the pessimistic view, most analysts believe that the USD will appreciate. The market can further expect a widening of front-end rate differentials in the USD's favor with the successful passage of the tax reform law.

In this forex research, we will examine the argument of optimistic analysts that the USD would gain ground in 2018, given several monetary and macroeconomic triggers.

FX Outlook

A major factor of the US dollar's collapse in 2017 came from the euro's strength. The USD weakened by greater than 12% against the euro. USD's bearish momentum has gained traction since EUR/USD broke above its 2017 highs. Eurozone investors have bought large amounts of foreign bonds since the start of the European Central Bank's (ECB) Quantitative Easing which are mostly unhedged. Analysts generally expect EUR/USD to climb to 1.30 by end 2019. However, there is a risk that Eurozone repatriation flows result in a faster rise.