Greenback fans have changed their sentiment a few times during the year

The expiring 2018 can be divided into three periods. In the January-March period investors were assessing the outcomes of trade wars, recalling former, negative for dollar, protectionism scenarios, discussing the disruptive effects of the U.S. twin deficit on the greenback, expecting that the Euro-area economy would retain its growth rate. In the April-November period, the USD was strengthening due to the growth-gap between the USA and other economies. And finally, in December, the sharp drop of stock indices and concerns about a slowdown in the U.S. economy growth get investors to be negative about the dollar.

During most of the year, the greenback was rising due to the broadening of the US budget deficit; the clash of expansionary fiscal policy and monetary restrictions by the Fed is likely to be the highlight of 2018. In December, investors have understood that the dollar won’t have the former drivers in 2019. High borrowing costs, revaluing, weakening effect of the fiscal stimulus and a drop in the foreign demand are strong obstacles, holding back the US economy. The situation is worsened by the correction in the equity market. Three major US stock indices have lost over 9% in December, and the S&P 500 is going to feature the worst drop since 2008.

Dynamics of Dow Jones Industrial Average and US GDP

SourceTrading Economics

Political disability, concerns about the Fed independence and the government shutdown add problems to the greenback fans. According to Standard & Poor's, each week of the executive power inactivity will cost the US GDP $1.2 billion. It is not so much for the $20-trillion economy; however, the longer lasts the conflict between Donald Trump and Democrats, the worse it is. For example, the two-week government shutdown in October, 2013 didn’t affect the best performance of the GDP rate in the fourth quarter. A similar situation was in 1995. So, the dollar may have problems because of this only in the second half of January.

Reuters tries to find an explanation for the dollar weakness in the bidding process on December 27-28 in the US-China trade conflict escalation. The US administration is allegedly considering banning the use of products made by Chinese Huawei Technologies and ZTE. In fact, during most of the year, trade wars were seen as one of the growth drivers for the USD due to high demand for Treasuries. Foreigners were buying the U.S. Treasury bonds when the U.S. didn’t have any problems; based on the stock indices crash, difficulties, and serious ones, have appeared.

Dollar is entering 2019 with strong concerns about its future. However, in my opinion, just the fears that the Fed will end tightening its monetary policy and the US GDP rate will slow down are not sufficient to get it crashed. First, traders need proof that the things will be really so. Second, the main rival, the euro, must be strong and steady. Until it occurs, the EUR/USD is highly likely to consolidate in 1.125-1.165

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Price chart of EURUSD in real time mode

Three lives of dollar

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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