Dollar could weaken for years
Published on 28.11.2018 18:46

The US dollar has been the star performer in the currency markets this year, gaining solidly against all the major currency but some are beginning to predict that the party may be about to end and the damage could last for many years.

Since the start of the year, the Greenback has been on the up, reversing its fortunes from the previous year as the US economy gathered momentum but the gains may have had more to do with weaker economies in Europe and China rather than strength in the American economy

"In terms of why didn't the dollar keep on falling this year, it's not so much that the U.S. sped up so much more than expected, it's that the rest of the world slowed down," said David Kelly, from JP Morgan

"Looking to next year, we know that the US is going to slow down to the rest of the pack." He added.

If "the economy just slides down to 2 per cent growth and then maintains it, then that's a scenario in which the dollar could fall for multiple years, But if there's some shock that pushes the US into recession, causing another global crisis, then if it's bad enough, then people might fly to the dollar as a flight to safety." Mr Kelly added.

The reason the dollar may cease to grow is the rising expectations that the US Federal Reserve will halt there rate hiking cycle sometime next year which is much earlier that first predicted and with multiple rate hikes already priced into the dollar, the chances of a substantial fall are very realistic.

"Ultimately, the trajectory is for a downward move in the dollar over a multi-year period," said  Gabriela Santos, also from JP Morgan

"In the second half of next year, if the Fed did indeed pause, if the US economy were decelerating, if the rest of the world stabilized or improved a little bit, you could see how the dollar could fall." He added.

The material published in on this page is produced by the FIBO group companies, and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC; furthermore it has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

Andrew Masters

Analyst

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