USD: Appreciation trend expected to continue - Wells Fargo

According to analysts from Wells Fargo, the upward tone in the US dollar is likely to continue, with a potential peak during the first half of 2018; then a depreciation trend could start. 

Key Quotes: 

“The greenback has gained over the past month as U.S. economic data have generally been stronger than expected, Fed commentary has become more hawkish and the financial markets have priced in a March Fed hike. We expect this trend of U.S. dollar appreciation to continue as the market moves toward fully pricing in a June rate increase. More generally, as U.S. economic growth shows a slight upswing, supportive fiscal policy remains a potential upside risk for growth and the U.S. dollar.”

“There are also some hints of policy adjustments from foreign central banks, although for now those hints remain tentative. The European Central Bank (ECB) is about to start reducing the pace of its asset purchases and its language has become less dovish in recent months. In contrast, the Bank of Canada’s policy outlook remains relatively benign, and indeed slightly lower oil prices have weighed on the Canadian dollar recently.”

“While we believe there will be eventual tightening by foreign central banks, we expect that eventuality will be more relevant for currency markets in 2018 than in 2017. The U.S. dollar could face countervailing forces in 2018. Repatriation flows associated with tax reform could potentially support the dollar, but foreign central bank moves could potentially weigh on the greenback. Against this backdrop we see an overall peak in the greenback in the first half of 2018, ahead of a depreciation trend in the U.S. dollar beginning in the second half of next year.”
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