After recording its worst annual decline of 10% in 14 years, the U.S. dollar continues its rough patch this year. This is especially true as the ICE dollar index tumbled to the lowest level against the basket of major currencies since January 2015. As such, PowerShares DB US Dollar Bullish Fund (UUP – Free Report) ,tracking the dollar index, has shed 1.3% so far this year.
Tightening Policy
Strengthening global economic growth and a rebound in commodity prices that have raised the prospect of monetary policy tightening outside the United States dealt a major blow to the dollar. The cheap monetary policy era ended in Asia with South Korea becoming the first major central bank to increase interest rates for the first time in more than six years. The Bank of England, too, has raised interest rates for the first time in more than 10 years.
The European Central Bank (ECB) will start scaling back its massive €60 billion per month asset buying program to halve from January 2018 until at least September 2018 while the Bank of Japan will continue its massive stimulus program until the economy reaches a sustained 2% inflation.
The tightening of policy will be in line with the Fed and push the U.S. dollar lower and other currencies higher, signaling more pain for the greenback. Additionally, the political development in the Euro zone is giving support to the euro and a report that the Netherlands and Spain were open to a deal for Britain to remain as close as possible to the trading bloc led to a spike in sterling.
The weakness in the greenback came despite the dual tailwinds of U.S. economic growth being on solid footing and the Fed being on track to raise interest rates. The combination usually leads to a stronger dollar.
Weak Dollar: A Boon
A weak dollar has fueled a superb rally in blue chip companies, which derive most of their revenues from international markets. Notably, the Dow Jones climbed 25% last year, marking the best annual performance since 2013. It breached the 20,000-mark on Jan 6, 2017 and moved up 5,000-points last year, marking the biggest annual gain in its history. Further, the 30-stock index topped 25,000 on Jan 4, 2017 registering its fastest 1,000-point move ever.
