Dollar Thrashed Into Year End

In the last week of the year, the US dollar succumbed to broad selling pressure.  Nearly all the major currencies appreciated by at least one percent against the dollar, save the Japanese yen, which gained about 0.6%. There did not seem to be a macro spark for the sell-off. 

Ironically, the consensus appears to be a mirror image of a year ago.  At the end of 2016, with the prospect of populist winning European elections, and the promise of strong fiscal stimulus in the US, investors and speculators were bullish on the dollar.Now it seems that nearly everyone is bearish the dollar.  

Evidence that the synchronized global expansion is strengthening has failed to help the dollar.  This macro fact is not seen as changing the trajectory of Fed policy but is thought to increase the chances of policy responses elsewhere.The Fed says it will reduce its balance sheet by $420 bln in 2018 and raise rates three times.Initially, the market has ignored the small paring of the balance sheet ($30 by in Q4 17) and is quite skeptical that the Fed will deliver three rate hikes as the median dot plot anticipate.  

At the same time, many investors see the substantial current account surplus in Japan and the eurozone as an indication that barring a systemic crisis, the euro and yen have a tailwind.  In contrast, the US has current account deficit, which despite the dramatic improvement in energy imbalance, is seeing overall deterioration.  

The Dollar Index fell just shy of 10% in 2017, snapping a four year advance. It finished at three-month lows, falling for nine of the past ten sessions.The descent extended to almost 92.00.The year’s low was set in early September near 91.00.A break of that low targets 88.40, the 61.8% retracement of the rally from mid-2014 through the end of 2016.On the upside, 92.50 may offer initial resistance and a move above 93.00-93.20 would help begin repairing the technical damage.