For the almighty dollar, 2017 has been nothing short of abysmal. Next year might be even worse.
Despite a recent bounce back, analysts and investors say the greenback could lose more ground against the euro and yen as the prospect of strong economic growth and tighter monetary policy outside the U.S. more than offsets higher interest rates at home. The dollar is down more than 7 percent versus the world's major currencies this year, the most in over a decade.
The economic growth "we're seeing in Europe, emerging markets and the rest of the world will likely cause the dollar to sell off again," said Erin Browne, the head of asset allocation at UBS Asset Management, which oversees about $770 billion. When it comes to what central banks in Europe and Japan might do, "there's very little priced in."
Browne says the euro could reach $1.30 in 2018, representing a 10.7 percent advance against the dollar. That would be on top of a rally of about 12 percent this year. She also expects further gains in the yen. The dollar was at $1.1748 per euro and 113.50 yen.
It wasn't supposed to turn out like this. At the start of the year, strategists were almost uniformly bullish on the dollar as traders embraced President Donald Trump's election and his pro-growth promises of lower taxes and higher infrastructure spending. The Federal Reserve was also set to raise rates, providing more support for the currency.
Yet, much of that optimism soon unraveled. Yes, the Fed has raised rates twice (and another is expected today), but the rally never materialized as lackluster inflation and pessimism over the ability of Trump and his fellow Republicans to make good on their legislative promises took their toll.
Currency traders sold dollars this year despite a surge in forward interest-rate swaps, which are essentially a bet on more tightening by the Fed. Instead, they bought euros and yen.
Now, many see the Fed closer to the end of its tightening cycle, which has the $5.1 trillion-a-day foreign-exchange market more focused on the European Central Bank and the Bank of Japan. The shift comes as global growth is expected to strengthen to 3.7 percent next year, the most in seven years.
For the euro, any sign of an economic pickup that prompts the European Central Bank to wind down its bond-buying stimulus could fuel further gains against the dollar.
"Most of the people that we talk to wouldn't be terribly surprised if, by the end of next year, the dollar was substantially weaker," especially against the euro, said Daniel Katzive, head of FX strategy in North America at BNP Paribas.
In the futures market, hedge funds and money managers have piled into bullish bets on the euro, pushing them close to a six-year high on a net basis.
Business on 12/13/2017