Kruger sees room for the dollar to decline further and adds that “there was also an expectation the Fed would follow through with two more hikes in 2017, but the central bank is once again at risk of moving the goal posts as the US economic data slowdown is proving it may be more than transitory.”
While a June rate hike is expected, that may be it for 2017 in terms of rate hikes. Persistently low inflation expectations at a time when the US economy is running at almost full employment, combined with recent disappointing economic data (especially when compared to the eurozone), suggest the economy may not be doing as well as the Fed thought a few months ago.
“Euro/dollar may reach 1.15-1.17 over the next few months (from 1.13 now), but only then will it finally become compelling to sell the euro,” said Kruger.
But fundamental downside risks to the dollar remain, believes Lukman Otunuga, Research Analyst at FXTM. And these are especially connected to disillusionment about Donald Trump.
“Dollar bullish investors seem to have lost the inspiration to support prices as expectations of US president Donald Trump moving forward with the proposed fiscal spending have faded,” he told Expert Investor.
“I feel that the fading relationship YTD between the interest rate differentials of the dollar index and dollar strength may be due to an increasing focus on US politics which has pressured the currency.
“Dollar weakness could become a dominant theme in the third quarter of 2017.”
State Street’s Graf, however, disagrees: “I’m left to wonder why we are so downbeat on the dollar now.
“There is no real expectation of the US meeting its inflation targets but we can’t see a recession either.
“From that perspective, the negative dollar premium (relative to the interest rate differential) doesn’t make sense. I would say to euro or sterling based investors to take advantage of dollar strength during the rest of the year.”
And that’s exactly what Tim Peeters, head of securities portfolios at the Belgian multi-family office Portolani, has been doing. “I sold most of my dollars in December, and have started to rebuild my positions in the last couple of weeks,” Peeters said.
What could also help the dollar is an increase in volatility, renewed political turbulence in Europe or an equity market correction.
“I believe the odds for a capitulation in equities have increased, and risk liquidation flows invite a flight to safe haven assets such as the US Dollar,” said Kruger.
