Last year was the worst for the US dollar since 2003. The greenback fell almost 10% against a basket of major trading partners, and analysts expected the decline to continue in 2018.
The thinking was that tax cuts hadn’t done much to buoy the currency at the end of the year, and other major central banks in Europe and Japan would start raising rates to close the gap with the US. If the dollar was going to appreciate it would only be a little at the start of the year, before resuming its downward trajectory. Goldman Sachs predicted a “soggy dollar,” while UBS, Lombard Odier, and Société Générale all forecast a decline against the euro.
It hasn’t played out that way. The dollar currently sits at its highest level in a year:
Since the start of the year, an index of the dollar versus other major currencies has gained more than 5%. The US currency has gained more than 6% against the euro, its most commonly traded counterpart.
The surge isn’t showing signs of stopping. There is a net long position in the US dollar at the moment, meaning the balance of traders think the currency is going to appreciate rather than decline. This is near the most bullish positioning since February last year, according to a Reuters calculation of data collected by the US Commodity Futures Trading Commission.
The unexpectedly strong dollar has even caught Donald Trump’s attention, who generally boasts about such things. An overly strong dollar could hurt companies, as exports become more expensive and foreign earnings are worth less when translated back into dollars. The president blamed the Federal Reserve for the dollar’s recent gains, but it’s largely his own doing.
Tax cuts, spending increases, and deregulation helped lift US economic growth to an annualized rate of more than 4% in the second quarter, at a time when many other countries are losing economic momentum. Even if it’s just a temporary boost, it’s been enough to make the dollar a more appealing place to park funds than the alternatives.
Meanwhile, Trump’s trade war has also bolstered the greenback. The currencies of countries facing US tariffs, such as the Chinese yuan, have declined as traders fear a trade war with the world’s largest economy will hurt economic growth. (At the same time, however, a weaker currency softens the blow of the tariffs by making exports cheaper for foreign buyers.)
The dollar’s strength is a danger for some emerging markets. Take Turkey, whose currency has been in freefall as the president rails against higher interest rates despite double-digit inflation. Instead, Recep Tayyip Erdogan blames the lira’s collapse on a US-led conspiracy, and called for a boycott of American products, increased tariffs on other US imports, and said his countrymen could rely on the protection of God.
Turkey’s large stock of dollar-denominated debt (paywall) means its troubles won’t go away soon, as investors worry about how it will pay back the debt as the dollar appreciates. The jitters have also spread to other countries with high levels of foreign currency-denominated debt. The Indonesian rupiah recently fell to its lowest level in three years, forcing the central bank to raise rates for the fourth time in three months (paywall). Argentina’s central bank hiked its benchmark interest rate to 45% this week.
Amid the turmoil, a traditionally popular haven asset—gold—is also sinking. Gold prices are currently at the lowest levels since January 2017. Analysts suggest that yellow metal has lost its allure as a haven because of the dollar’s strength (paywall), the currency it’s usually denominated in. In the first half of the year, global gold demand was its weakest since 2009, according to the World Gold Council. Other precious metals are faring no better.
Many analysts remain convinced that the unexpected bout of dollar strength is just a blip. Morgan Stanley says the dollar’s downtrend should resume soon, while UBS says this is just a corrective rebound that can be undone by even a small change to interest-rate expectations in Europe. Lombard Odier suspects that the dollar’s rally will come to an end soon, if not because global interest rates will converge then because of something Trump does.
“In his electoral campaign in 2016, Donald Trump promised higher economic growth, and a stronger dollar does not act as a support for growth-oriented policies,” said Stéphane Monier, the firm’s chief investment officer. Although Trump has spoken out against the stronger dollar, the consequences of his actions don’t always match the intentions of his statements.