US Dollar falls to three month low after worst year since 2003

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3 January 2018

thomasdodds

The US Dollar continued to lose ground against its major peers on the first full trading day of 2018, with the greenback slipping to a more than three month low in trade-weighted terms and to its lowest level since September versus the Euro.

C
urrency traders have become increasingly optimistic over an improving economic backdrop in the Eurozone in the past few weeks, with investors growingly confident that the European Central Bank will end its quantitative easing programme this year. Speaking over the holiday period, ECB member Benoit Coeure claimed that there was a ‘reasonable chance’ that the large scale stimulus programme would not be extended beyond the September 2018 end date.

The US Dollar suffered from its worst year in more than a decade over the course of 2017, having experienced a fairly disappointing performance over the Christmas period. Amid doubt over Donald Trump’s ability to force through his long awaited tax cuts, the currency fell by more than 9% against its major peers last year. This marked its worst yearly performance since 2003 when the greenback lost almost 15% of its value.

This evening will see the release of the Federal Reserve minutes from its December meeting when policymakers in the US raised rates for the third time in 2017. Given it is unlikely to materially change expectations for the pace of hikes this year, employment data on Friday should take on more importance.

Sterling climbs to three month high ahead of Brexit talks

Recent weakness in the US Dollar meant Sterling jumped to a three month high as markets opened in the UK for the first time this year.

Investors brushed aside a very disappointing manufacturing PMI, possibly due to its relatively small contribution to overall GDP in the UK. The index unexpectedly declined to 56.3 in December from November’s 58.2, a much steeper drop than the market had priced in. This morning’s construction PMI is not expected to materially shift the Pound as we instead await the more significant services index.

Looking to 2018 as a whole, Brexit should continue to be the main driver for the Pound, particularly given the Bank of England has made it clear it is in no rush to raise rates again following its November hike. With March 2019 the soft date for Brexit to be completed, this year will be an intense period of negotiations and discussions that will be key for Sterling. Breakthroughs and progress in talks could fuel further gains for the currency this year.