Forex Year Review - USD
The dollar has had an interesting year too but once again it has been about politics more than economics. When Donald Trump was elected it was clear that the volatile character would impact the state of the economy and the markets but few would have guessed that he would attack Federal Reserve Chairman Jerome Powell on a regular basis on Twitter, especially after he had a hand in hiring him. The US president used tariffs as a political bargaining chip and in turn cash flooded to the US as a safe haven and the dollar surged. This led then to many central banks buying more dollars as a risk hedge and US-denominated fixed-income assets.
The impact of the trade uncertainty has been a massive plus for the greenback. Throughout the year the dollar has been grinding higher but the Dollar index could not break the 100 level. The US does not really want a stronger dollar as it makes their exports less competitive and they have been trying to induce inflation. Away from that GDP, employment levels and the stock markets have a massive plus. The US economy has been motoring on ahead with the consumer remaining strong and the markets remaining buoyant. If the data remains on this path it will be hard to justify not moving on rates although the futures market is pricing in a small possibility of one cut next year.
Price Action and Next Year
The dollar has pulled back recently and this is as largely due to the fact the protectionism trade is being unwound. When Trump started the trade war with China lots of dollar were bought up and now they have agreed on a "phase one" deal the dollar is getting softer and returning closer to mean value. It pretty amazing after the year we have had that at the moment the DXY is only 0.31% higher. Leading into next year we have the US elections where Trump looks set to win again but there is one credible candidate in Mike Bloomberg. Lots will be done to knock Trump off his perch including the impeding impeachment trials. In terms of the Federal Reserve, It looks like they will remain very neutral and continue to support repo markets by adding some liquidity. They are refusing to call this QE but in effect is it a wolf dressed in sheep's clothing and has the same effect. The weaker dollar and stronger stock markets are confirming that....