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As the new year draws near, we have seen very little consistency in the performance of the U.S. dollar. The greenback has been moving back and forth and we are still seeing more profit taking than new positioning in the dollar. Of course, this isn’t a surprise as overstretched moves around major holidays invites liquidation. We could see one final jolt of volatility with the markets in full holiday mode this week.
Short-term price action aside, with the Federal Reserve looking to raise interest rates three times next year, 2017 should be a good year for the U.S. dollar. That is, unless the strong dollar kills corporate earnings, Trump tantrums overshadow Trump stimulus, and the Fed raises interest rates two, instead of three times next year.
Time and again we’ve heard U.S. companies attribute earnings misses to currency translations. A strong currency hurts corporate earnings by reducing the value of foreign profits and making U.S. exports less competitive on the global market. According to Factset data, 30% of U.S. based S&P 500 firms draw over 50% of their revenue from outside the U.S. and the value of this revenue is now less in U.S. dollar terms.
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| 2017 should be a good year for the U.S. dollar. |
We were having this same conversation this time last year when USD/JPY was trading above 120. The strong dollar was also a big problem then, and in less than 6 months, it sank down to 100.
There are no less than 10 key consequences of a strong dollar (list below) that investors need to keep a watchful eye on in 2017. And with this in mind, it would be dangerous to expect an uninhibited rally in the dollar next year, especially since it’s a crowded view.
10 Consequences of a Strong Dollar:
1. Less Exports, More Imports, Wider Trade Deficit
2. Lower Inflation
3. Lower Commodity Prices
4. Weaker Earnings for U.S. Companies with Significant Foreign Revenue
5. Less Pressure on Major Central Banks like ECB to Ease
6. More Pressure on Emerging Market Nations with Dollar Denominated Debt
7. More M&A Transactions (which may not be a consequence)
8. Weaker International Investment Returns
9. More Pressure to Outsource
10. Less Demand for Currency Alternatives such as Gold and Bitcoins
In the coming year, if there are any delays to Donald Trump’s fiscal stimulus program or there are signs that it may not be as aggressive as he promised, the rally in stocks and the dollar could be unwound. Any of this could lead to less tightening from the Federal Reserve next year, which is also dollar bearish.
Of course, if none of this becomes an issue it should be smooth sailing for the buck. This could easily result in parity — or below for the Euro/USD exchange rate in 2017. And we expect the 120 level in USD/JPY to be reached sometime in the coming year as well.
Happy Trading,
Boris Schlossberg
{ 16 comments }
Dear Boris,
The yen is a complete basket case. The Japanese govt. may operate a bullet proof bond market, as they are the only participants, but the currency market reflects their insanity. I have no doubt their desire to re-inflate, their economy, will soon be fulfilled with hyperinflation.
Notice how the yen, started collapsing, last July, at exactly the same time as the 36 year bull market in bonds ended. It is all part of the end game which will be played out this year.
Volatility is back!.
Adrian.
won’t a stronger american dollar also beget a stronger yen? won’t a toyota become a better value in american under a stronger dollar, thus japan’s sales increase? so, no need to weaken the yen anymore, and a stronger yen to come? could it be the win-win situation america had with japan after ww2 starting all over again?
At this late stage, I learn that my Cad Bk does not accommodate dual cy trades of the type your service uses. I note the A/c opening options you have provided but, due tech & other probs. that can arise, hesitate to go the next step. Pls. provide any help, like an institution & competent person to offer further guidance.
Stop the waffling! What exchange rate do you predict for Euro/Dollar in 2017/High&low
John
What can you say. A countries governments up to its AZZ in debt and for the most part bankrupt but still a strong dollar? Keep drinking up the cool aid all is well, you bet ya!
So; increasing interest Fed rates, makes the dollar stronger or weaker? This is a little confusing.
it’s increasing demand for borrowing money that strengthens the dollar.
a sign of an improving economy.
the fed then raises rates to slow down the rate of borrowing so the economy doesn’t grow too fast an become bloated with inflation.
it’s sort of like pulling back on the reins of a racehorse that wants to run too fast out of the gate and become exhaust before the finish line.
most people equate a fed rate hike with a strengthening dollar, but it’s really a way to slightly slow an improving economy that is the real cause of a stronger dollar.
boris is the best currency guy i’ve ever had the pleasure to follow. he’s also highly versed in stock market moves. read the writings of boris and the confusion will subside, jim.
You are wrong on your analysis re the dollar because inflation goes up when the dollar goes up and gold also goes up. There will be no more paper gold trades once China takes over the gold market on 12-31-2016. The dam banks days of manipulating commodities will be over soon. These banks in the USA and overseas are a bunch of crooks and they all need to be put in jail forever. Plus the federal reserve and the other 31 central banks owned by the Rothchilds also be should be put out of business. We are still in a recession these people lie like the government of the USA are dam liers about everything. The stock market is way over valued an it will crash .
Stock tip of the day buy Toshiba.
why buy toshiba
Bitcoin basically tracked the dollar index prior to it’s latest surge. I’m wondering why you think less demand for Bitcoin with a strong dollar if the price simply keeps pace with the dollar (which it’s now outperforming dramatically)?
For foreign buyers, Bitcoin might be the best alternative to at least keep pace with the dollar. Especially if dollars themselves are scarce in their country, dangerous to own (confiscation), and if gold keeps falling.