Strategists and speculators at odds over dollar outlook

Foreign-exchange strategists are at odds with speculators over the forecast for the dollar, accentuating the ambivalence over the trend the world’s reserve currency will have next year.

The consensus is that the dollar will depreciate in 2019, with much of the weakness expected in the second half of the year as moves in monetary policy start to favour other currencies, including the euro.

However, that prophecy appears as speculative bets on an improvement in the dollar stand near the highest levels of the year.

The past 12 months have afforded a sign of the uncertainties of being overly fearless in forecasting currencies. At the outset of this year, the consensus among most investors was that the greenback would proceed to decline – a forecast that came unstuck in April as the clear performance of the US economy saw the dollar index, a broad measure of the currency, jumped 8 percent in a matter of months.

Its strength hit emerging market economies with current account deficits and plenty of dollar-denominated debt but likewise presented the European economy with some relief via a weaker euro. As the Federal Reserve persisted in tightening monetary policy, investors rediscovered the appeal of dollar-denominated assets as the allure of riskier bets, such as in emerging markets, eroded.

The consensus view for a weaker dollar in 2019 is premised on the expectation that weaker growth in the US prompts the Fed to stop raising interest rates while the European Central Bank proceeds to withdraw the stimulus.