Macroscope | Why 2018 could be a year of great promise for the US dollar

It is no exaggeration to say 2017 has been a tough year for US dollar bulls. Disappointments over US President Donald Trump’s promise to deliver radical reforms and past policy dithering by the US Federal Reserve have rained heavy blows on US currency optimism for much of the year. But if 2017 was the year of deep dollar disappointment, 2018 should be the year the dollar comes up trumps.

The currency’s luck is changing. The first hint of success on Trump’s much-vaunted tax overhaul was a welcome relief for the currency, but this week should see more good news with the Fed toughening up on US monetary policy. Wednesday’s Fed rate policy decision should be all important, with another quarter point rate rise priced in.

For currency traders, placing successful bets is a perennial problem, generally down to picking the best of a bad bunch. It’s true now, as most currency majors are fraught with problems and riddled with risk. The dollar has been thumped by super-loose monetary policy, the euro haunted by debt default risks, the yen is suffering from years of deflation neglect and the British pound is being battered by deep-rooted Brexit fears.

For years, forex speculators have had to grapple with acute political risks, financial crises and impending economic doom. Safe haven plays into ultra-safe bolt-holes like the Swiss franc might have kept sleepless nights to a minimum, but traders have paid dearly for it in terms of negative carry costs. Striking gold on currency bets is only down to smart thinking, good timing and a pinch of good luck.

Riding the bow-wave of impending apocalypse back in 2008 was a white knuckle ride for most investors, but extreme volatility and roller-coaster price action was also a godsend for the brave-hearted who got their timing right on wild market moves. In the current climate of muted volatility, super-low interest rates and wafer thin bond yields, currency gambles are much more challenging.