The US Dollar is down over 9% year-to-date against a broad basket of the world's fiat currencies, tumbled over 10% against gold, and has collapsed against Bitcoin; but, as Bloomberg's Garfield Reynolds warns, the dollar's worst year since 2003 is about to get "even grimmer" in 2018...
The one point of clarity coming out of Washington is that tax reform isn’t about to save the dollar where Fed rate hikes have failed.
CFTC data showed dollar shorts increased again in the second half of November after shrinking to the smallest level since June. That snapped a move that had suggested investors were about to go net dollar-long.
The dollar’s surge at the end of 2016 was built around accelerating U.S. growth and belief that the Fed would lead the developed world in tightening policy.
U.S. growth is still strong, and the Fed is still tightening, but the rest of the world is catching up and there’s doubt the U.S. can cope with significant dollar gains.
Tax reform was flagged as the next fuel for the rally, but that looks unlikely.
Backers of the plan say cutting corporate tax rates will fire up the economy, but the Fed and the IMF haven’t changed long-term forecasts for U.S. GDP even as the odds grow that some sort of reform will pass.
Monday’s news that Republican senators kept the alternative minimum tax for companies highlights how the partisan rush to pass the bill increased the odds of a flawed package.
It’s also illuminating to consider that the retreat in tech stocks is being attributed to speculation those firms will benefit least from the tax changes -- because existing breaks designed to encourage innovation arguably did just that.
Turning that around, it implies that those sectors that will benefit most are some of the U.S.’s least dynamic. That undermines the arguments for stronger growth.
The flattening of the Treasuries curve -- with benchmark 10-year yields totally range-bound -- is another vote of no-confidence.
That helps explain what is a very broad-based retreat: USD is in the red in 2017 against almost two-thirds of the 110+ global currencies that aren’t constrained by a peg.
Expect to see fresh breakouts for EUR and JPY, as the respective central banks are forced to cut stimulus thanks to burgeoning growth in Europe and policy exhaustion in Japan.
Traditional high-yield plays such as KRW, AUD, NZD, BRL will have a bias to climb (TRY and ZAR could join that list if politics takes a back seat) amid a positive global growth backdrop.
This time twelve months ago, markets were gearing up for the ’Year of the Dollar.’ That turned out badly, but the year ahead could be even bleaker now that its fans have abandoned it.