Why the tide is turning against the US dollar

You would be forgiven for feeling confused about the outlook for the major currencies over the coming months.

Uncertain economic cycles, mixed monetary messages and dodgy politics are leaving investors in a deep fog about future exchange rate trends. It will leave forex players at the mercy of casino betting in the months ahead. Heads you win, tails you lose.

Even the usually robust US dollar, the forex market’s friend in the last few years, is starting to lose its lustre as the market begins to reassess the outlook for US Federal Reserve tightening set against a less certain future for the American economy ramped up by new president Donald Trump. The vicissitudes of Trump’s first 100 days in office have hardly been a call to arms for US dollar bulls.

Meanwhile, the conventional wisdom of the stronger US dollar/Europe trade risks being turned on its head. Europe’s election cycle, considered by most forex pundits as the bête noir of the euro single currency, is suddenly looking a lot less menacing. Europe passed the election test in Holland last week and next month’s French presidential vote could well surprise on the upside for the euro.

Even dollar/Asia seems to be losing momentum. China’s worry about being branded a ‘currency manipulator’ seems to have prodded the authorities into drawing a discrete line in the sand to stop further slippage by the renminbi. And worries about the global outlook also seem to be sparking concerns among Japanese investors to return to home waters after the yen’s rout in the second-half of 2016.

It is all leaving currency expectations up in the air with little for traders and investors to get their teeth into. Expectations about growth cycles, inflation dynamics and relative interest rate plays may be pointing towards more US dollar dominance, but not by nearly enough to compensate for any ‘roll-of-the-dice’ political shockers. The markets will just have to play it by ear in the coming months and stay fleet of foot.

Next month’s French presidential vote, September’s German elections, the danger of Trump’s presidency getting badly bogged down and a deeper crisis developing over North Korea all have the propensity to whip up market volatility and leave currency players exposed.