The fact of the matter, when you sort out the conflicting forces is that the US Dollar is putting a significant bottom in place and that it is only a matter of time before interest rate differentials take over and sort out the real trends from the noise.
Despite the strong desire of hedge funds to maintain the EUR at elevated levels for their august close, the US Dollar has definitely bottomed out and is ripe for a major reversal as can be seen from the three top charts above.
The main culprits are doubts about the strength of the US recovery, positive economic surprises in Europe and more and more realization that Donald J. Trump’s economic package will probably never be implemented.
The Japanese Yen has always been and advanced indicator of the behavior of the US currency and the daily chart above shows that the US DOLLAR may be making its first higher Low in a saucer formation, a configuration that usually indicates a reversal of the downtrend that has been in place since January 2017.
Sterling fell roughly 16.2 percent against the dollar to mark its worst year since 2008 on worries over Britain’s June 24 “Brexit” vote to leave the European Union.
The EUR fell 3.81 % over the year and the Japanese Yen had a roller coaster ride, starting the year at 120, it appreciated to 101 before aflling back to 117.
The dollar posted sizable gains this year against the Mexican peso and the Chinese yuan of 20.6 percent and 7 percent, respectively.
The peso suffered from Trump’s proposals to build a border wall and rewrite trade agreements with Mexico, while the yuan has been pressured by capital outflows from domestic Chinese.
The US currency appreciated against almost every currency in 2015 by an average of 12 %, making US labor and US products that much less competitive.
The trade of the Year was to be short the Japanese Yen and the EUR against the US Dollar to finance long positions in Us Dollar denominated investments. The build-up of US Dollar long positions led to disappointing returns against the Japanese Yen, which ended the year where it started it, and the CHF that saw massive volatility in January as the Swiss National Bank changed its policy tools and abandoned its ‘peg’ against the EUR.