The greenback, which has been trading at the highest level in 14 years, may continue its bull run in 2017 on the back of hawkish tone from the US central bank amid loose fiscal policy from the new Trump administration.

A possible three rate hikes next year would make dollar a higher yielding currency, making it more attractive, and may cause a further sell-off in emerging market currencies. The greenback has gained nearly 11 per cent from the lowest point struck in May. On Monday, the dollar index traded at 102.96.

“In the first part of 2017, it is hard to bet against the dollar given a very high probability of higher rates and at the very least a perception that US growth will lead the developed countries,” said Gary Dugan, chief investment officer at Emirates NBD.

While growth in the US has been exceeding expectations, the GDP elsewhere in Europe and the United Kingdom has been lagging expectations. And this along with other negative fundamental factors could spell trouble for currencies like the euro, the pound and other emerging market currencies.

“With the US economy likely to remain the positive standout, the dollar is likely to benefit and risk currencies are expected to remain subdued should geographical unrest increase,” Dugan said.

“The euro, in particular, faces downside risk from the calendar of important elections that could deliver significant protest votes. Emerging market currencies remain vulnerable until Donald Trump sets out a clear vision on if and when he puts in place protectionist measures against countries such as China,” Dugan added.

The euro has shed 3.67 per cent against the dollar, while the pound has weakened by 16 per cent against the greenback. The emerging market currencies, like the Indonesian rupiah or the Indian rupee, have also been on a downtrend.

And for David Kohl, Chief Currency Strategist and Head Economist Germany, Julius Baer, the forecasted dollar appreciation is materialising faster and is more pronounced than previously expected.

Julius Baer expect the dollar-Japanese Yen ratio to be at 121 in three months from the current 117. The bank expects the euro-dollar rate to be at 1.03, slightly weaker than the 1.04 forecasted before.

The bank has also revised its three-months forecast for the dollar-Chinese yuan higher to 7.15, for dollar-Korean Won to 1210 and dollar-Singapore dollar to 1.47.

Among the emerging market currencies, the Turkish lira (TRY) faces more pressure in the more pronounced dollar bull market, given the strong Turkish dependency on international money inflows to finance its current account deficit.

Julius Baer has revised its forecast on the dollar-Turkish Lira to 3.7.

“For the time being, the combinations of US rate hikes and a solid cyclical backdrop hide the possible negative consequences of a stronger US dollar for US monetary conditions and the economic outlook. This facilitates a powerful overshooting of the US dollar over the coming months,” said Kohl from Julius Baer.

Divergence

However, UBS has a divergent view compared to most others. It feels the dollar is overvalued and expects it to reverse to a less extreme position in the next 12 months.

“While the US growth picture improves, which is supportive of the currency, other drivers — such as negative real rates, larger fiscal deficits, and unexpected policy bumps as the Trump administration shifts from the campaign to a governing mode — should be sizable obstacles,” Max Kunkel, ultra high net worth investment strategist at UBS Wealth Management told Gulf News in an email.

“Hence, our central theme: prepare for a weaker greenback. In this context, both the euro and the pound should become less undervalued based on purchasing power parity,” Kunkel added.

source : gulfnews