Everyone thought 2017 was going to be the year of King Dollar. Following President Donald Trump’s election on November 8, 2016, the U.S. Dollar (USD) rallied more than 4.5% against the Euro (EUR) — gaining from 1.1018 to close 2016 at 1.0521.
But that U.S. Dollar rally quickly fizzled. EUR/USD reached its low (1.0340) on January 3. Through the rest of the year, the Dollar lost 16%, closing at 1.2018 on December 29.
What happened? Not only did the Dollar abruptly turn in its tracks, but that turn came despite the fact that the Federal Reserve remained the only central bank taking a prolonged tightening stance throughout the year.
The Dollar’s performance in 2017 is a head scratcher. According to long-time forex and currency futures trading legend Yra Harris: “No one has a definitive answer as to the fundamental reason why the U.S. Dollar fell.” Harris said many have speculated on different reasons for the move, which include the Trump administration’s preference for a weaker Dollar and the possibility that China might offer an alternative to paying for Crude Oil in Dollars.
“There are a lot of things in play that aren’t making sense. Traditional correlations aren’t playing out,” Harris added, pointing to the spread between European and U.S. sovereign debt. A spread favoring U.S. investments would usually be supportive of the Dollar, but that’s not happening. “While I’m not sure what the driving element is, there is something driving the U.S. Dollar lower at this point.”
Wall Street has seemingly taken on one narrative: the Federal Reserve’s tightening was already priced in and European growth surprised to the upside. Quartz labeled the Eurozone’s growth “the economic surprise of 2017,” noting that its 2.2% GDP growth in 2017 was Europe’s best year in
Contrast that with the narrative on January 1, 2017. Brexit was less than six months old, and there was concern populism could sweep elections in France and other European countries. Ultimately, the market’s worst fears did not materialize.
But even if the European growth narrative explains the Euro’s outperformance, why did the U.S. Dollar lose ground against every other major currency, from the Swiss Franc (CHF) and Japanese Yen (JPY) to the Australian (AUD) and New Zealand Dollars (NZD)? And if the reason behind the move was so clear, why did macro hedge funds drastically underperform? According to the Barclay BTOP index, currency futures funds fell 9% in 2017.
Those questions take us back to Harris’ sage wisdom: “Something is going on, but I can’t tell you what just yet.”
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