The U.S Dollar had its first yearly decline in 2017 after five strong years, and now analysts are wondering whether the dollar will stage a comeback in 2018. You can hear predictions in favor of both sides – some assume that the interest rate hikes of the Federal Reserve will be the difference maker, while others see the European Central Bank stop feeding the markets with easy money, allowing the Euro to keep its relative strength vs. the dollar. But I would not recommend anyone to make any investment decisions based on these predictions – One thing about currencies predictions is that they are nice to have, but rarely true.
Will the dollar bounce back in 2018? Will it continue to fall? we hear lots of predictions for the new year, but how accurate can analysts really be when it comes to currency exchange?
The last year has been a perfect example of this notion. The U.S dollar entered 2017 after years of solid gains, and most importantly, with the anticipation of this trend to continue. The interest rate was already higher in the U.S than in Europe, Japan, and other Western economies in the beginning of 2017, and the gap was expected to grow even more.
Indeed, the Federal Reserve raised the interest rate three times in 2017. However, as we find out quite often in the financial markets, changes are not important if they are already priced. They become important when they are unexpected. And that is exactly what happened with the U.S dollar – the markets have already priced the interest rate hike in the price of the dollar, and once they realized that the interest rate will be hiked in a more moderate way than initially anticipated, the dollar fell.
To that we should add that the markets have priced a major fiscal policy change led by a new president eager to cut taxes and to invest in infrastructure. While the tax cuts did take place, their effect on the dollar is still unknown.
The Federal Reserve intends to keep hiking the interest rates in the U.S, but the American economy still imports more than exports, which has a negative effect on the dollar. Another negative effect on the dollar is the rally in the markets – the dollar is considered to be a safe haven and when everything else goes down, the dollar goes up. But 2018 started exactly as 2017 ended, and it does not seem that the market will fall anytime soon.
Frankly, I have no idea if 2018 would be a good year for the dollar. All I know is that I do not want to take part in the impossible game of currency exchange predictions, and definitely not expose my money to it.