The 15% fall in the USD over 2017 took many by surprise. Interest rate differentials have dominated forex markets over the last decade and rising US interest rates were widely expected to lift the USD. While this was the story of 2016, last year was very different.
One explanation of the surprising weakness is the positioning argument. The Fed communicated its intentions early and regularly in an attempt to reduce market and economic shock. This meant the US Dollar index began to rise in 2014, eventually pushing some 30% higher as the Fed’s message gained traction.
After the recent fall there are good reasons for traders to ask what it will take to strengthen the USD. Clear signs of expansion in the US economy are supportive, and there are a number of flow factors that point to a higher USD. The repatriation of funds by US companies from their overseas operations due to recent changes to tax law is an example, as are rising US exports. And Bloomberg analysis of US interest rate markets reflects a 99% probability of a rate hike following the March 21 Fed meeting.
This combination of factors suggest it’s a matter of when, not if, the USD will rise. And the USD/JPY chart is at a potentially key turning point.
