US Dollar Poised For Medium-Term Strength

MARCH, 2018

AK Equity Group
Recent US-imposed tariffs and expected interest rate hikes set the stage for medium-term strength in the US dollar.

With an aim towards strengthening its economy by addressing a perceived trade deficit, the US has imposed a new set of tariffs, largely targeted towards China. Aluminum and steel tariff exemptions were granted to the European Union, Mexico, Canada, Brazil, Argentina, Australia, and South Korea. However, some of these countries may still face an export cap limit into the US.1 The remaining $50 billion in tariffs imposed will likely target high-technology products, meant to punish China over allegations of intellectual property and technology transfers.2

In addition to the newly-imposed tariffs, increases to the interest rate may also contribute to medium-term strength for the US dollar, with the Federal Reserve Bank gradually increasing interest rates for a total of three rate hikes this year with projections of two additional rate hikes next year.3

Euro outlook remains intact

ECB officials, particularly the head of the German and the Estonian central banks, would like to see an interest rate hike as early as mid-2019. However, our outlook remains intact, with the ECB’s target inflation to near but slightly below 2%. This was recently reinforced by ECB’s chief economist Peter Praet, who stated, “It is fair to say that we are still some way short of achieving full and durable convergence of medium-term inflation.”4 Thus, we may still see slight medium-term weakness in the euro.

RBA projections holding steady

RBA expectations remain unchanged as the minutes published in March indicated inflation target is still near its 2% projection by the end of the year.5  RBNZ maintained its accommodative monetary policy as well, and will do so for a considerable period.6 As such, the medium-term outlook on the Australian dollar and New Zealand dollar is slightly less strength.