Will the Dollar Weaken in 2017?

After the shock of Trump winning the election wore off, markets rallied. The assumption has been that a combination of tax breaks, infrastructure spending stimulus and money repatriated from corporate offshore accounts will trigger an economic boom in the USA. Inflation would rise according to this scenario and the Fed would raise interest rates and thus drive the value of the dollar higher. An alternative view is that the dollar will weaken in 2017. CNBC projects the US dollar getting weaker.

The Federal Reserve’s long-awaited rate hike, expected to come in December, could have some unexpected effects, strategist Jim Paulsen told CNBC on Monday.

Paulsen, Wells Capital Management’s chief investment strategist, voiced his theory for “the big wild card in 2017″ on “Squawk Box.”

“I think the dollar’s going to go down, not up,” he said. “There [have] been five major increases in the funds rates since the 1970s, and every one of them, when the Fed raised rates, the dollar came down.”

The strategist said what’s driving rates higher are rising inflation expectations, which could in turn hurt dollar strength. “As inflation expectations go north, that’s a deterrent and a negative for the U.S. dollar,” he said.

In short, inflation and not the increase in interest rates will be dominant according to this view. If the view that foreign investments will be more attractive than those in the USA is correct then we may not see the expected Trump rally for any length of time.

Too Many Bulls

When everyone thinks that a currency will keep going up is usually the time to sell. Market Watch writes about the pause in the longest win streak for the dollar in more than three years.

The U.S. dollar weakened against its major rivals Monday as traders paused for breath following 10 straight days of gains for the currency, the longest winning streak for the greenback in over three years.

The buck has been supported by continued expectations for higher interest rates by the Federal Reserve, as well as by the prospect of fiscal stimulus following the election of Donald Trump. The U.S. dollar index hit its highest level since April 2003 last week, and the dollar briefly hit a fresh multimonth high against the yen during Asian trading hours.

Since the election, the dollar index is up more than 3%, and “it’s difficult to know how much further this bull can run especially that it’s driven by animal spirits, and yet no fundamental evidence,” Hussein Sayed, chief market strategist at FXTM wrote in a note.

Our opinion prior to the election was that predicting anything in a Trump presidency would be perilous. This is still the case as traders are basing their trades on rhetoric rather than clearly delineated plans. Trump likes the limelight and likes to be seen wheeling and dealing. He likes to hold his cards close to his chest and thrives on the drama of “important” announcements that often turn out to be pure hype. Will the dollar weaken in 2017 or will it rise? Forex options in order to hedge risk may well be the best bet in the coming years.