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The U.S. Dollar In 2019: Stronger Rather Than Weaker

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by: John M. Mason
John M. Mason
Banks, long-term horizon
Summary

The value of the U.S. dollar rose relative to the Euro and the British Pound in 2018, basically because of what was happening in that part of the world.

It appears as if this scene will continue into 2019, as England faces its Brexit issues, and the European Union deals with Germany, France, and Italy all facing government problems.

If the economic situation in the U.S. stays relatively calm, the value of the US dollar should move a little higher in 2019 than where it currently is.

Well, it’s time to take a look at the 2019 future for the value of the U.S. dollar.

In 2018, the U.S. dollar strengthened… but, not initially.

At the start of the year, it took a little more than $1.2000 to purchase one Euro. The U.S. Dollar Index (DXY) was just a little under 92.00.

By February 1, 2018, it took just over $1.2500 to purchase one Euro and the U.S. Dollar Index had dropped to 88.63.

I was feeling pretty smug at this point in time for in my December review of the 2018 horizon for the performance of the dollar I argued,

“It seems as if the market is now looking for reasons for the U.S. dollar to decline, and this will create an underlying softness in the market throughout 2018.”

More specifically, I wrote, “I tend to believe that it is more likely that the value of the dollar will be more in the range of $1.23 to $1.28…”

“The important fact to me, however, is that traders will be looking more for the value of the dollar to drop and will therefore tend to move with negative news more than with any positive news that might be forthcoming.”

This smugness held up until around April 20, 2018 when the dollar began to strengthen. The price of one Euro dropped below $1.2300 and the U.S. Dollar Index rose to 90.34.

The rest of the year saw the U.S. dollar getting stronger and stronger. By May 1, it took less than $1.200 to buy a Euro and the U.S. Dollar Index moved to 92.47.

In reviewing my posts following this time period, three factors impacting the value of the dollar seemed to stand out. First, U.S. economic growth appeared to be picking up, while European growth seemed to be softening. Second, this allowed the Federal Reserve System to move forward on its path to continue to raise its policy rate of interest and continue to reduce the size of its securities portfolio. Third, the European Central Bank, noting the slowing of European growth, pushed off the time before it ended it’s quantitative easing and began to raise its policy rate.

In the fall some political factors seemed to be contributing to the dollar strength.

First, it became more obvious that the management of Brexit in Great Britain was a disaster.

Then, as the fall went along, we saw that Europe, itself, was having all sorts of problems.

And, as the year progressed, things did not get better in either England or the European Union.

The dollar got even stronger. Currently, one Euro costs about $1.1335 and the U.S. Dollar Index is now about 97.30. And, with all the fuss over the Brexit plan in England, one British pound only costs $1.2560, where just a month ago, one pound costs more than $1.30.

This sets the stage for 2019.

The primary focus for the coming year in terms of the value of the U.S. dollar, I believe, rests over in England and Europe. The political mess that exists in these two areas is not going to go away.

Who can really imagine what the inept Theresa May will cause as she continues to carry on the responsibilities of prime minister of England? And, the other current leaders don’t seem to promise much better.

And, Europe is having its own leadership problems. The rising star, Emmanuel Macron has taken a hit in recent weeks and appears to have lost his sparkle. In Germany, Angela Merkel moves back into the shadows as her party now has a new leader, although the CDU picked a Merkel protégé Annegret Kramp-Karrenbauer as her replacement. Then there is Italy, now led by a populist coalition that has presented a budget that the EU leaders in Brussels has roundly criticized. Furthermore, the European Central Bank will replace its current leader, Mario Draghi in the coming year.

The U.S. dollar, I believe, will stay relatively strong, not so much because of what it does or doesn’t do, but because other countries around the world are experiencing situations that will continue to make their currencies relatively weaker.

Of course, United States leadership could undermine all of this.

In terms of U.S. monetary policy, the Federal Reserve, until recently, has taken a relatively strong stand on maintaining its policy of raising its policy rate and reducing its securities portfolio.

In recent weeks, Fed officials have seemed to back off this path. The general consensus seems to be that the Fed will raise its policy rate this month, as planned, but is less likely to increase the policy rate three more times in 2019, something that officials had strongly supported until just recently.

Furthermore, the Federal budget and the federal debt seem to be rising without much discipline being exerted. Large amounts of public debt…along with lots of other debt…coming to market in 2019, could cause the Federal Reserve to back off its plans for increasing its policy rate, and might even cause the Fed to ease up on its efforts to reduce the size of its securities portfolio.

Pressures like these could cause the Fed to back off and re-think what its stance should be in 2019…and 2020. Backing off could have keep the value of the dollar from getting even stronger.

And, President Trump still prefers a weaker dollar...to a stronger dollar.

My basic feeling is that the Fed will continue to keep on its path of increasing its policy rate in a regular way. I think the Fed will raise its policy rate in December, and then will follow on with at least two more increases in 2019. The Fed will continue to reduce its securities portfolio, although it could reduce the amount of securities it removes every month.

If this is true, then I believe that the value of the U.S. dollar will stay relatively strong in 2019, and if anything trend a little bit lower than it is now. Let’s say that the price of one Euro could drop to as low as $1.1000 this coming year, but stay in the $1.100 to $1.1500 range for most of the year. This would put the U.S. Dollar Index in the range of 95.00 to 100.00 for the year.

I have not talked at all about the relationship of the U.S. dollar to China’s renminbi. I believe the U.S. dollar/Chinese renminbi tradeoff is different and needs to be discussed within another context. This I will do in the next two or three days.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.