The US dollar has one more round of fight left in it. But its bull run has been tiring for a while now and, after a final bout of strength mid-year, the greenback will hit the mats versus a range of other currencies. The dollar has been taking a bit of a breather recently and even aggressive easing moves out of foreign central banks haven’t been enough to energize the currency.
The greenback was also dealt a blow last week from the release of more dovish than anticipated FOMC projections. In the aftermath of the release, markets pared back expectations for Fed tightening this year, with barely one rate rise now fully priced in for 2016.
While the wind may have been knocked out of the dollar, current market positioning does leave room for a mid-year Fed rate hike to drive strength in the currency. A June rate increase is currently less than 50% priced into futures markets and, if implemented as we expect, would also likely force traders to hedge against a second 2016 hike. Together, that would drive the value of the greenback higher versus a range of currencies around the middle of the year.
Copy signals, Trade and Earn $ on Forex4you - https://www.share4you.com/en/?affid=0fd9105
However, following that bout of strength, the greenback will fall from its perch. By the time the second half of 2016 rolls around, other major economies will have begun reaping the rewards of past monetary stimulus and, despite the Fed likely taking rates higher a second time in December, their exchange rates will begin to reflect the more positive fundamentals. Note that the US’ trade deficit contrasts sharply with the surpluses seen in regions like the euro area. That will be another weight on the greenback’s performance moving forward.
All told, after a temporary boost, the bull run will be down for the count. However, it’s not all bad news as a slightly weaker exchange rate will support the ongoing moderate expansion in the US economy.
