What’s Next for the Dollar?
The U.S. economy is still in solid shape. Consumer sentiment remains relatively strong and interest rates are rising.
So why is the dollar struggling?
In spite of good times for the U.S. economy and markets, the dollar has been in the dumps in 2017. The U.S. trade-weighted dollar index has declined 5.5% for the year through June 30 and the dollar fell 1.6% in June alone.
Signals from global central banks are partly to blame for the dollar’s weakness this year. The European Central Bank, as well as the Bank of Canada and Bank of England, recently said they would consider beginning to wind down the monetary stimulus aimed at boosting their economies in recent years.
With those announcements, investors anticipated that interest rates would rise in those economies and consequently, those investors bought the currencies. Both the euro and the Canadian dollar posted large jumps in June as talk of the stimulus wind-down picked up. The euro was up 8.1% against the dollar by the end of June while the Canadian dollar rose 3.3% with a big jump in June.
Investors are also favoring Europe this year due to its strengthening economy and receding political uncertainty. Corporate earnings in Europe have been strong so far this year, and the election of Emmanuel Macron in France helped bolster investor confidence, also adding to the euro boost.
It isn’t just improving prospects internationally that has aided the decline of the dollar – a lack of movement on President Trump’s proposed policies has also weakened it. After his election in November 2016, the dollar soared. During the campaign, President Trump promised plans for infrastructure investment and tax reform, both of which cheered U.S. investors and pushed up the greenback.
However, since then, some investors are starting to wonder when such potentially stimulative policies will be implemented. Meanwhile the U.S. economy remains strong, but there is growing concern as to how long this already lengthy economic expansion can last.
There are advantages to a relatively weak dollar:
- Exports from countries with relatively weak currencies are cheaper. If U.S. exports become more competitive, corporate profits could increase.
- Technology companies, many of which generate significant percentages of their revenue overseas, could see big benefits from continued dollar weakness.
Don’t count out a possible rebound for the dollar just yet. If tax reform or another stimulative policy is implemented, the dollar could strengthen. The same could happen if the Federal Reserve raises interest rates steadily this year and next.
And as the U.S. economy continues to show its resilience, as it did with the stronger than expected jobs report on July 7, investors could come back to the greenback before long.
Segal Marco will continue to explore the state of the U.S. economy and markets in the upcoming Q2 Outlook.