Dollar to Climb in 2018

USD and Asian currencies set to outperform in 2018.

Looks like 2018 will be the year of the US dollar and Asian currencies as Mainland Europe contends with Brexit and MiFID II fallout.

That’s the view from David Kohl, Chief Currency Strategist at Julius Baer regarding the outlook on the US dollar, Euro and emerging market currencies. He shared his findings and 2018 FX outlook with Traders Magazine recently.

David Kohl, Julius Baer

Kohl gave an overview where he argues for the supremacy of the US Dollar over all given its current interest rate advantage combined with a return of popularity on the back of superior economic data flows.

As for other high-yielding emerging market currencies, Kohl said his firm was advising clients to conduct exposure “selectively” in 2018, preferring currencies with better governance.

“After the considerable weakening of the US dollar in 2017, the key question for 2018 in the foreign exchange (FX) space is whether this trend will continue,” Kohl began. “We think that a change in direction is increasingly likely, at least in the first half of 2018. This view is very much consistent with our growth outlook for the US and the rest of the advanced economies, especially the eurozone. Already now, the interest-rate differential favors the US dollar over the euro and a superior US economic data momentum would increase US dollar popularity again, after reaching extremely low levels in the last weeks of 2017.”

However, he cautioned that there are limits to a US dollar rebound, as peak divergence in monetary policy is behind us and the greenback’s valuation is not particular appealing.

“The euro is by and large the mirror image of the US dollar. Our hypothesis for 2018 is that the euro euphoria built up in 2017 will not continue,” Kohl said. “The negative feedback loop of a strong currency weighing on the economic outlook will become apparent for the eurozone in 2018 and drive the EUR/USD lower to levels around 1.14.”

When looking at the emerging market currencies, Kohl said he sees selective opportunities in 2018 – Asia versus Latin America.

“Regionally, we favor Asian currencies over Latin American and emerging European ones. While fundamentals have strengthened in most emerging markets, Asia is the only region which has also improved its governance.”



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