In the dollar we trust? USD outlook on the Fourth of July

As the US celebrates the adoption of the Declaration of Independence with traditional pomp and circumstance, it is worth taking a look at how far the dollar has come this year, and where it might yet go as the second half of an unpredictable 2018 gets underway.

At the start of January, the dollar was in the midst of a downwards spiral as US policy concerns took hold and the additional benefit of Fed rate hikes seemed limited, while the outlook in the Eurozone and the UK seemed to be improving. In February, the dollar hit its lowest levels against the euro in three years; two months later, it hit its lowest levels against the pound since the 2016 EU referendum.


EUR - USD Rate predictions



GBP - USD Rate predictions

Yet since then we’ve seen a reversal of fortunes. Geopolitical tensions with Russia and North Korea seem to have stabilised for the time being, while trade relations with NAFTA partners and China in particular remain a significant concern. The Fed is now projecting a median of four, not three, rate hikes this year, although for some the outlook has become less certain, not least because of the looming trade war. Rising bond yields, a sign of confidence in the economy, again correlated with dollar strength as ten-year yields hit 3% for the first time since 2013. These shifts, combined with renewed weakness in the euro and the pound, saw the dollar regain as much as around 8% against the euro and 9% against the pound by June.

In the wider historical context, what does this mean? Euro-dollar has held above 1.15 since last June, but prior to then 1.15/1.16 had acted as an upper bound—since 2014. On the cable side, we’re now back to November levels, but still up nearly 10% from the lows hit in January 2017, rates last seen in the 1980s.

For those looking to buy dollars, the picture may be less rosy than it was earlier in the year, but the time is more opportune than had been the case for much of the past two years. And for those looking to sell dollars, current levels may offer some relief.

Could the outlook change in the second half of 2018? Much of that depends on how political and economic factors play out over the coming months.