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Look Past U.S. Dollar’s Plunge, 2018 Could Be Its ‘Last Hurrah’ - Capital Economics

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Look Past U.S. Dollar’s Plunge, 2018 Could Be Its ‘Last Hurrah’ - Capital Economics

(Kitco News) - The current U.S. dollar’s plunge is temporary, says Capital Economics, noting that a recovery is on its way, but warning that the currency might face renewed pressure in 2019.

The Fed’s plan to tighten its monetary policy this year will be the main underlying factor supporting the greenback, John Higgins, chief markets economist at Capital Economics, said in a note on Monday.

“We expect the dollar to stage a modest rebound against most other developed market currencies this year, as the contrast in the monetary policies of the Fed and other major central banks generally proves to be a bit starker than investors are anticipating,” Higgins wrote.

Capital Economics projected last week that the Federal Reserve will raise rates four times this year, prompted by a rebound in core inflation. This is more than the markets are currently projecting and will boost the U.S. dollar.

“Our long-standing view [is] that the Fed will be a bit more hawkish in 2018 than the markets seem to be envisaging, while the ECB and the BoJ keep their policy rates on hold,” said Higgins.

In terms of expectations of the U.S. dollar moves against other currencies, Capital Economics forecasts for the euro to edge down against the greenback to $1.15/€, while the yen will drop to ¥120/$, and the sterling will remain at around $1.35/£ by the end of 2018.

But, the estimated U.S. dollar recovery in 2018 is already looking threatened by 2019, said Higgins.

“2019 is likely to be a different story, though, with the dollar coming under renewed fire as monetary policy provides it with less support,” he pointed out. “The yield of 10-year Treasuries will drop back to 2.5%, as the Fed’s tightening cycle ends earlier than expected amid signs of slowdown in the US economy, but that the yields of 10-year Bunds and Gilts will climb further as monetary policy in the euro-zone and the UK is tightened.”

In the meantime, the U.S. dollar index tumbled to three-year lows on Monday, hitting 90.43, down 0.52% on the day, according to Kitco.com.

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