Will the US Dollar
Crumble in 2019?
Macro2018 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 rise in the dollar 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 ofits 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 a challenging one for the U.S. economy and the U.S. dollar as America’s longer 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 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 growth but in 2019 the U.S. slowdown that could hamper global growth. USD/JPY is the most vulnerable to a decline that could take the pair as far down as 105.
The good news is that while this could prevent meaningfullegislation, 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 wagesare growing at its fastest pace since 2009. Inflation is on target, gas prices are low and all of this translated into strong holiday speending. According to Mastercard 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 stabilizingafter 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, 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 could encourage further reserve diversification out of U.S. dollars.
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