By all accounts, 2015 was the year of the dollar as the greenback surged against its major counterparts. The dollar was up around 10% versus a basket of trade-weighted currencies, with some of its strongest gains registered versus commodity currencies such as the Canadian dollar and the Australian dollar, while it also gained around 10% versus the euro on policy divergence.
Interestingly, the dollar’s gains were not evenly distributed throughout the year as the dollar index surged to a fresh 12½-year high in mid-March but then spent the rest of the year trying to overcome those gains and correcting from those highs. The dollar index came close to overcoming those levels during November and December – mainly on euro weakness – but the March highs nevertheless held.
Most of the dollar’s ups and downs had to do with the speculation of when US interest rates would finally rise for the first time in 9 years. Coming into 2015, many analysts expected the Federal Reserve to raise rates from zero as early as June. However some soft data regarding the economy’s performance during the first quarter of the year, delayed the hike. September was the other time where a rate hike was expected; however worries about the slowdown in China and emerging markets and some financial market turbulence in August following the devaluation of the Chinese yuan in August forced the Fed to put off the rate hike. After the decision not to hike in September, speculation started to mount that the Fed would not hike at all during 2015. This forced the Chair and other board members of the Fed to come out strongly in favor of a rate hike soon and the October meeting prepared the ground for a December hike, which eventually became reality.
The US economy did relatively well in 2015; with a growth rate around 2.5% and unemployment down to the 5% area, but inflation was weak due to low energy prices. The focus for financial markets now shifts to how many rate hikes the Fed will deliver during 2016. The dollar is still favored by most investors as central banks that are tightening policy are relatively rare in the global economy. Fed policymakers expect to hike four times in 2016, the markets expect about two more rate hikes – so it will be interesting to watch the economic data unfold and what their effect on monetary policy will be.
To read more, please download the full report in PDF version below: