Dollar rally runs out of steam

In January the US dollar index slid by 3.5%, its worst start to the year in over a decade.

At the start of 2016, virtually everyone was expecting a strong dollar. Virtually everyone was wrong. The dollar index, which tracks the greenback against a basket of major trading partners' currencies, spent most of the year sliding or treading water, only bouncing in mid-November after Donald Trump's election. It hit a 14-year high in early January, prompting widespread forecasts of further gain this year. But history may be repeating itself. In January the dollar index slid by 3.5%, its worst start to the year in over a decade.

The rally "looks to be running out of steam", Pictet Asset Management's Luca Paolini told the FT. The problem is that, "having priced in all the possible good Trump-related news", everyone has finally started to ponder "what might happen if [his] plans fall short or hit the buffers". Trump promised stimulus through deregulation, tax cuts and infrastructure spending. But quite how much of this programme he can get through Congress is hard to gauge. So the boost to growth, and in turn the prospect of higher interest rates, which increase the appeal of US assets, may be less assured than markets first thought. "The dollar's rally hinges strongly on the Federal Reserve moving from one hike a year in 2015 and 2016 to more in 2017," says Philip Wee of DBS Bank in Barron's.

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Andrew Van Sickle
Editor, MoneyWeek

Andrew is the editor of MoneyWeek magazine. He grew up in Vienna and studied at the University of St Andrews, where he gained a first-class MA in geography & international relations.

After graduating he began to contribute to the foreign page of The Week and soon afterwards joined MoneyWeek at its inception in October 2000. He helped Merryn Somerset Webb establish it as Britain’s best-selling financial magazine, contributing to every section of the publication and specialising in macroeconomics and stockmarkets, before going part-time.

His freelance projects have included a 2009 relaunch of The Pharma Letter, where he covered corporate news and political developments in the German pharmaceuticals market for two years, and a multiyear stint as deputy editor of the Barclays account at Redwood, a marketing agency.

Andrew has been editing MoneyWeek since 2018, and continues to specialise in investment and news in German-speaking countries owing to his fluent command of the language.