Economic & Market Commentary, May 2018

After losing nearly 10% in 2017 and an additional 4% in January, the U.S. Dollar Index has rallied more than 5 % off its February lows. Gains have been driven by several factors, particularly due to increasing Federal Reserve (Fed) rate hike expectations and repatriation of overseas profits as prescribed by the new U.S. tax law. Weakness in emerging market (EM) currencies because of several flare-ups in trouble spots such as Turkey and Argentina, along with the populist wave in Italy, have added support to the dollar. The dollar is important for many reasons, including its impact on foreign trade and on overseas corporate profits. So, where does the dollar go from here?

Forecasting currency movements with any accuracy over the short term can be difficult. Although some fundamental factors that impact currencies can be measured and perhaps predicted with some accuracy, even the most logical relationships do not always hold. For example, the Fed, which began to increase its target short-term interest rate in December 2015, increased rates three times in 2017. Meanwhile, the European Central Bank (ECB) did not increase rates at all – and was not expected to until well into 2018. Sounds like a positive environment for the dollar, right? Not so much. The euro rallied 15% last year versus the dollar amid strong data and relative political stability.

Since the dollar is now going up, something has changed his year. The gains may be attributable to the following:

Faster pace of rate hikes by the Fed. While the Fed rate hikes on the surface may have been expected to boost the dollar in 2017, they were largely anticipated. Expectations for 2018, however, have been rising all year amid a pick-up in inflation and improving economic growth. Four rate hikes in 2018 have become consensus (more than 50% probability) compared with late last year when three rate hikes were considered more likely based on what the bond market was pricing in.

Weaker growth in Europe. Economic data have been missing expectations in Europe at an alarming rate. Based on the Eurozone Citigroup Economic Surprise Index, European data have been missing at a rate similar to the European debt crisis in 2011. Inflation data have been weak, too, pushing out expectations for European rate increases. Slower than expected growth in Europe may be a positive for the dollar.

Repatriation of overseas profits. The Tax Cuts and Jobs Act passed last December included a required tax on overseas profits, setting the stage for repatriation of a corporate cash pile held overseas. Strategas Research Partners estimates $500-700 billion in additional repatriated funds will come back to the U.S. Perhaps only a portion of that money is held in foreign currencies. Even so, as that money is converted into dollars it would have a positive impact on the greenback.

The dollar has staged a solid comeback recently, and strength may continue in the near term, driven by divergences in monetary policy between the Fed and other major central
banks, repatriation of foreign cash, and weaker than expected economic data overseas. Currency weakness in some trouble spots such as Turkey and Argentina may persist.
However, structural forces including the U.S. current account and budget deficits may ultimately limit dollar gains.


The views expressed are provided for information only and are not to be used or considered as an offer or solicitation to buy or sell securities or investment products. To
determine which investment(s) may be appropriate for you consult your financial advisor. The economic forecast set forth in this presentation may not develop as predicted,
and there can be no guarantee that strategies promoted will be successful.

• The economic forecast set forth in this presentation may not develop as predicted, and there can be no guarantee that strategies promoted will be successful.
• Investing in stock includes numerous specific risks including the fluctuation of dividend, loss of principal, and potential liquidity of the investment in a falling market.
• All indexes are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses or sales charges. Index performance is
  not indicative of the performance of any investment.
• Currency risk arises from the change in the price of one currency against another.
• Investing in foreign and emerging market securities involves special additional
  risks. These risks include but are not limited to currency risk, geopolitical risk,
  and risk associated with varying accounting standards. Investing in emerging
  markets may accentuate these risks.
• Data provided by LPL Financial, Citigroup & Strategas Research Partners, LLC.
• All investing involves risk including loss of principal.