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There’s a big debate raging across wall street about the future of the us dollar is it finally set to weaken versus its peers or will it continue to strengthen in the coming year here’s a chart of the u.s. trade weighted dollar now this tracks the dollars value versus the currency of major us trading partners as you can see here it is strengthened considerably
Versus its peers since the beginning of 2018 and it now sits at its highest level in about two decades it’s a surprising move for a few reasons and the trend looks set to continue much to the chagrin of president donald trump who is consistently railed against the economic impact of a strong us dollar now the first reason has to do with the federal reserve so a
Big component as to why the dollar strengthened so much versus its peers in 2018 has to do with the fact that the federal reserve was raising interest rates while other central banks around the rest of the world were keeping their already low rates low or moving them even lower than that level what change was in january when the fed made a sharp u-turn in the path
Of its monetary policy six weeks prior who had raised rates for the fourth time in 2018 and in january it said it was actually going to consider cutting interest rates in the face of softening us economic data and in july it instituted the first of three 25 basis point cuts to its benchmark policy rate it moved in july it moved once again in september and then it
Moved it once again in october the only effect the feds u-turn had on the dollar was for it to strengthen versus its peers and this was because the likes of the european central bank the bank of japan were rolling out very aggressive stimulus packages and cutting interest rates and so that interest rate differential that helped to explain the strengthening of the
Us dollar versus its peers during 2018 persisted well into 2019 and it looks like it’s set to persist again in 2020 given the fact that the fed has recently that is going to put a stop to any additional easing for the time being until it sees bigger deterioration in the economic data and now that brings us to our second reason relative economic growth back in 2017
President trump unveiled a series of tax cuts aimed at turbocharging the u.s. expansion dad helped to buoy the dollar to some degree but economists warned that the effects of those tax cuts would be short-lived helping to build the case for a weaker dollar but that hasn’t happened as you can see in this chart given the fact that growth around the rest of the world
Was pretty lackluster at best in china for instance the growth rate slowed dramatically despite a series of stimulus measures put in place over recent months and in europe’s largest economy germany it was on the brink of recession and so when you had us growth outpacing that of the rest of the world it helps to shore up the dollar versus those other currencies
And then there’s the ongoing us-china trade war the us dollar plays a very important role in the global financial system it serves as a safe haven asset for investors who flocked to it during times of turmoil and that’s very much been the case as the trade war between the us and china has escalated over the past 12 months now recent headlines have pointed to some
More positive developments on this front but in the last week things have taken a turn a bit for the worse for instance president trump recently said that he would be willing to wait until after the presidential election next year to strike any kind of preliminary deal with china within the same week he also raised tariffs on france argentina and brazil so these
Trade tensions that have helped to buoy the dollar haven’t gone away so taking this altogether the trend that has dominated since 2018 of a strong dollar it looks set to persist for some time at least what it would take to reverse the dollars fortunes would be a sizable progress on the us-china trade front as well as a shoring up of growth globally and that looks to be a tall order
Transcribed from video
Why the strong US dollar trend may persist | Charts that Count By Financial Times
