The U.S. dollar had a rough year in 2017, with the benchmark U.S. dollar Index (DXY) falling 11% for the
year and the dollar declining in value against every currency from the “Group of Ten” industrialized countries.
What’s the potential for 2018?
Dollar stumbles in 2017
The dollar began 2017 priced for perfection, having
rallied 6% between election day in November 2016 and
the end of that year. The U.S. Federal Reserve made
three interest rate hikes during 2017, as promised, but
the administration of President Donald Trump and the
Republican-controlled Congress had little success in
delivering on campaign promises.
Repeated attempts to “repeal and replace” the Affordable
Care Act ended in failure and there was no infrastructure
bill. To make matters worse for the dollar, the Consumer
Price Index actually fell over the course of the year, snuffing
out hopes for more rate hikes that might have acted to
support the dollar. Tax reform legislation finally was passed
and signed into law in December, and we think that
legislation will play a role in supporting the dollar in the
first half of 2018.
Key currencies rallied against the U.S. Dollar during 2017
Source: Bloomberg; percentage change in value of selected currencies vs. U.S. dollar for the
A tale of two halves in 2018
We now expect the dollar to rally in the first half of the year
and then reverse that move in the second half – if not slightly
sooner. By the end of 2018, we think the dollar’s value will be
lower than where it started the year versus most of the major
currencies. However, we think the depreciation in the dollar
will not be nearly as great as it was in 2017.
We think the dollar will get a boost in the first half of the
year from the recently enacted tax cuts as well as an expected
Fed rate increase in late March. This forecast assumes U.S.
inflation does not increase significantly and the market
accepts and uses the Fed’s guidance of 75 basis points in rate
increases for the year.
As we approach mid-year, we think the Fed will make
another rate hike in June, but by then the market is likely to
begin looking at the impact of the European Central Bank
ending its asset purchase program.
It also is possible that the Bank of Japan will recalibrate its
yield curve control program during the course of the year,
possibly by moving the target from the 10-year bond to the
5-year and allow its yield curve to steepen. That action in
turn would tend to support the yen.
The pound stands out as a possible exception, as we think it
could rally throughout 2018. The pound was oversold after
the U.K.’s decision to leave the European Union, or “Brexit,”
but has held up well through elections there and continued
Brexit negotiations. Barring a major derailment in those
negotiations, we think the pound could rally to $1.40-$1.45
by year end.
We also think the Canadian dollar could rally throughout the
year. A run of strong employment growth late in 2017 helped
push the Bank of Canada (BOC) to hike interest rates in
mid-January. This increase came two to three months earlier
than the market had expected in early December. While risks
from the ongoing negotiations on the North American Free
Trade Agreement, or NAFTA, could weigh on the Canadian
dollar, we think a strong U.S. economy combined with higher
oil prices and two to three more hikes from the BOC this year
are likely to support continued Canadian dollar appreciation.
Summary outlook for key exchange rates
There are some short-term headline risks that could impact the U.S. dollar, including geopolitical issues and
the ongoing distractions in Washington that have prevented the federal government from making headway on
key priorities. In addition, we can expect a debt-ceiling fight in March and ongoing headlines from the Trump
administration. In summary, we forecast exchange rates between the dollar and key currencies in 2018 as follows:
U.S. Dollar forecast to rally early in the year, but decline in value by end of 2018
||1st Half 2018
||2nd Half 2018
U.S. dollar to euro
||Dollar likely to rally in first half, then decline
Yen to U.S. dollar
||Dollar back to 2016 highs, then lower to end year
U.S. dollar to U.K. pound
||Steady gain likely in pound during year
Source: Ivy Investments forecasts of exchange rates in 2018 for currencies shown.
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The opinions expressed are those of Ivy Investment Management Company and are not meant as investment advice or to predict or project the future performance of any investment product. The opinions are current
through January 2018, are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. This commentary is being provided as a general source of information and is
not intended as a recommendation to purchase, sell, or hold any specific security or to engage in any investment strategy. Investment decisions should always be made based on an investor’s specific objectives, financial
needs, risk tolerance and time horizon.