US Dollar Outlook for 2018: USD Weakening to Continue?

US Dollar weakened against all its major rival currencies in 2017, the same is expected to continue in the year 2018 also. Despite of the prediction of rate hike decision by FED, US Dollar forecast still have a disappointing 2018.

USD: Strongest currency

US dollar is the strongest currency in the world as the relative strength of the economy supports the value of its currency. According to international standard organizations list, world has 185 currencies. Most of them are used in their own country only.

To say that any of the currency can replace US dollar as a strongest currency will be just theoretical because more than 50% of world’s GDP comes from countries that peg their currency to USD. Seven countries have adopted the Dollar.

Reason behind US dollar decline expectation

Decline is followed by many reasons and the main reason is pickup in the growth of rest of the world economy, which weakens USD.

“As the year progresses, we expect the rest-of-world growth story to dominate and extend the benign dollar decline,” says Chris Turner, Global Head of Strategy at ING.

Second reason of the US dollar weakening is the large build up of foreign owned positions in US financial markets, which are at risk of being redeemed. On the other hand, position of US owned assets in foreign market is small, which results in increased risk of USD supply imbalance.

US interest rate has risen more rapidly than rest of the world and it may continue in the year 2018 also.

Normally rising interest rate is a positive sign for currency appreciation as high interest rate attracts more foreign capital because of attractive return on offer, but expecting the same for year 2018 will be a bit risky.

The US dollar is forecast to continue its decline in year 2018 says Analysts at BMO capital markets in Toronto, an investment banking subsidiary of Bank of Montreal.

Most of the analysts were not negative on performance of US Dollar in the beginning of year 2018, but they also changed their mind set after negligible gain from tax bill.

Weaker dollar means

US shoppers will not be happy as their purchasing power will decline. Weaker US dollar will encourage domestic tourism and discourage foreign tourism. Commodities price which are denominated in dollar term like gas, oil, metals and agricultural commodities will also rise.