Macroscope | How to read the outlook for the US dollar
‘The euro and the Japanese yen are bound to be major beneficiaries from the dollar’s plight’
The dollar has had a challenging year to date and the odds are it will get worse before the outlook improves. A beleaguered US President Donald Trump, a dithering Federal Reserve and a general loss of market confidence in the currency all add up to a pile of problems for the dollar. The dilemma for investors is the alternatives may seem better bets for now but most major G-10 currencies have their gremlins. The dollar is not alone.
The dollar has had a rough ride so far in 2017, broadly losing around 10 per cent of its value against a range of major currencies, with the odds slanted to the downtrend continuing for quite some time. According to recent market data, speculative positions are just starting to build into a more negative outlook ahead. Any number of factors could tip the scales towards a bigger rush to the exits.
The US runs two big deficits in the shape of the nation’s large trade gap and the government’s budget deficit. In order to keep the dollar on a reasonably firm footing, the US needs to attract strong capital inflows. The US manages this by virtue of the world’s insatiable appetite for US financial services and demand for the dollar as the world’s No 1 reserve currency. But confidence here is the key.
And right now, market confidence in the US is in dwindling supply. Political ructions in the White House and uncertainty in the Fed about the outlook for US growth and inflation and their likely monetary policy implications are muddying the waters for investors. All of a sudden dollar perceptions are tumbling back down the rabbit hole again.
There should be no doubt about Trump’s presidency being in deep trouble. Late last year the markets were full of praise that the new presidency could bring sweeping change and reforms to the US economy, paving the way for new stimulus. The Trump “bump” has never materialised and the administration is now bogged down infighting with lost policy initiatives on many fronts.
Trump’s presidency looks like a survival course strewn with impassable obstacles. Trump seems increasingly isolated after the departure of so many key allies and advisers and it is hard to think how he can recover. With main muse and chief strategist Steve Bannon now gone, the market should resist any temptation to think redemption is close. A long and bumpy political road ahead seems likely.
