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Will The US Dollar Crumble In 2019?

By Kathy LienCurrenciesDec 26, 2018 04:44PM ET
www.investing.com/analysis/will-the-us-dollar-crumble-in-2019-200371103
Will The US Dollar Crumble In 2019?
By Kathy Lien   |  Dec 26, 2018 04:44PM ET
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Macro

2018 was a phenomenal year for the U.S. dollar. The trade-weighted Dollar Index appreciated nearly 5% and is up more than 9% from its low in February. Emerging-market currencies were hit the hardest by the dollar's rise but major currencies like the Australian dollar also lost 9.5% of its value. And now the good times are over. In the past 2 months we’ve seen zero forward momentum. Instead, the tide has shifted with the dollar falling against all of the major currencies. As 2019 begins, the big question is whether the greenback will unwind all of its 2018 gains. That’s a tall order but pairs like USD/JPY were down for the year and many are not far from their beginning-of-2018 levels. Either way, 2019 will be challenging for the U.S. economy and the U.S. dollar as America’s longest-ever expansion comes to an end.

The bad news is that a number of factors will inhibit growth in 2019 – volatility is rising, stocks are falling, borrowing costs are increasing, credit is tightening, housing is slowing and earnings growth is weakening. These trends, which are just beginning to emerge, will continue to dampen growth in the year ahead. Rising borrowing costs is a serious problem because it increases the cost of debt servicing for businesses at a time when share values are falling. The consequence is that businesses could cut back hiring and investment. Along with the tariffs, Chinese consumers are also reducing spending, which adds to the pressure on U.S. businesses. 2019 will also be a year filled with economic and political challenges in the U.S. With the stimulus from tax cuts fading, the weakening economy, decline in stocks, rise in interest rates and a divided Congress will keep President Trump’s hands tied.

None of this is good for the U.S. dollar. The greenback was a big winner in 2018 because U.S. growth led global expansion; but in 2019, the U.S. slowdown could hamper global growth. USD/JPY is the most vulnerable to a decline that could take the pair as far down as 105.

Micro

The good news is that while this could prevent meaningful legislation, it could also force Trump to secure market-friendly wins like a trade deal with China, infrastructure reform or middle-income tax cuts. The U.S. economy is also slowing from strong levels. The unemployment rate is at a 48-year low and wages are growing at their fastest pace since 2009. Inflation is on target, gas prices are low and all of this translated into strong holiday spending. According to Mastercard (NYSE:MA) Spendingpulse, between November 1 and December 24, retail sales rose 5.1%, which is the strongest pace of growth in 6 years. This tells us that the sell-off in stocks has not affected consumer demand and according to the table below, which tracks how the economy has changed over the past year, the housing market appears to be stabilizing after a difficult first half.

With that in mind, it is unrealistic to expect growth to continue at the same heady pace in the year ahead because as interest rates rise, stocks fall and businesses reduce spending, which means that wages and consumer demand will slow. Tighter financial conditions and fading stimulus will take a big bite out of growth in 2019, which will not only reduce the attractiveness of U.S. assets and the greenback, but may encourage further reserve diversification out of U.S. dollars.

USD Data Points
USD Data Points

Monetary Policy

Monetary policy could also pose a problem for the dollar in 2019. The Federal Reserve was the primary central bank raising interest rates last year but that will change as other countries move to normalize monetary policy more aggressively. At the beginning of 2018, the Fed said it would raise interest rates four times. This year, it is telegraphing somewhere between 2 to 3 rounds of tightening after expectations were downgraded this past December. Now, the Fed will still be raising interest rates in the first half of the year, which could lend support to the dollar but as the central bank makes it clear that less tightening is needed, the greenback will flounder. At its last meeting, Fed Chairman Powell told us that no future rate decisions are predetermined and everything is data dependent. This tells us that if the economy continues to slow, the Fed will delay raising interest rates. If it were to stabilize and start to turn upward, the central bank will be inclined to move more quickly. Still, as things stand currently, the Fed will be more conservative than aggressive with rate hikes. There’s opportunity in the gap between Fed guidance and market expectations. At the start of the year, Fed fund futures are pricing in no hike in 2019. The dollar has only started to fall, which means market positioning hasn’t accounted for no tightening. The greenback will remain under pressure until data or the Fed chair gives investors a reason to believe that a rate hike is coming, which means there’s also opportunity to the upside.

Since we believe that the Fed will raise interest rates in the first half of the year, dollar weakness in the early months could give way to a recovery as the Fed talks up the next hike. This will be followed by another leg lower when other central banks jump-start their own tightening cycles.

Will The US Dollar Crumble In 2019?
 

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Will The US Dollar Crumble In 2019?

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Comments (13)
Christopher Emeghara
Christopher Emeghara Jan 01, 2019 3:37PM ET
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thanks
João Felipe
João Felipe Dec 27, 2018 8:14PM ET
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Excelent...congratulations by 2018.
Gianni Righetti
Gianni Righetti Dec 27, 2018 6:43AM ET
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last year they all were saying the USD would have go down. they used the very same arguments of this lady. but the USD gained. now everybody is trying to make prediction on the base of the very same assumptions of last year. the truth is nobody knows what's going to happen next year. any fact can change everything. so we cannot know if it will be a challenging year or another good one. here in Europe things are not going well, nor are they in China. the only possiblity we have is politicians are not going to ruin the global economy.
Brian Forehand
Brian Forehand Dec 27, 2018 6:43AM ET
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JMO, but everything marijuana will start to take off. Everything from cbds, beverages, water, biopharmaceutical to medical marijuana. That should be in every State. Alcohol is 1.7 trillion annually. I see marijuana being a trillion dollar Industry in the next few yrs.Now is the time to buy. Best time to buy is when the market hits it's lows. Crypto isn't going away, it will be the way of the future weather we like it or not. lastly blockchain networking will be the future of tomorrow. I can keep the list going. It's real nice to have liquidity during a rescission.
Abdul Ghulam
Abdul Ghulam Dec 27, 2018 4:23AM ET
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great job ..thanks madam
N R videos
N R videos Dec 27, 2018 1:30AM ET
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what about trend bull and bear 2019
Tony Teo
Tony Teo Dec 26, 2018 10:12PM ET
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imho premature to discount us economic sustainability. new emerging factors reducing
Slow Toad
Slow Toad Dec 26, 2018 9:27PM ET
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you forgot to mention that they're printing dollars into oblivion
Ahmad Salman
Ahmad Salman Dec 26, 2018 8:36PM ET
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Very good. Also thanks when you expected Aud to fall you were 100%
Shu Guice
Shu Guice Dec 26, 2018 6:59PM ET
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right on Kathy
Ali Sabzabadi
Ali Sabzabadi Dec 26, 2018 6:36PM ET
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Thanks very usufull. I think EMs will see momey flow next year.
 
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