Report4 May 2018Updated one year ago

USD: Curb Your Enthusiasm

The US Dollar’s tale of Two Larry’s: When it comes to the greenback’s outlook, Larry David’s “Curb Your Enthusiasm” is probably a more fitting sound bite than Larry Kudlow’s “King Dollar”

Executive summary
  • At the heart of the USD’s 4% rally in 2018 is the question of whether US growth and interest rates are once again diverging away from the Rest of the World (RoW).
  • We don’t subscribe to this view – with the dollar move exhibiting classic signs of a counter-trend rally. Unlike 3Q17 though, heavier short USD positioning and thin market liquidity are likely contributing to the ‘speed’ of the current USD correction.
  • We believe that market expectations are now reflecting peak short-term economic divergence, meaning that the USD does not need to rally much further from current levels in the absence of a more pronounced decline in the RoW economic outlook.
  • Equally rate spreads have had little correlation with EUR/USD up until late April. Even if going forward they were to dictate EUR/USD moves, we would at best see a low of 1.17-1.18 this summer – before a broader recovery to 1.30 by the end of the year.
  • Plus it’s far too early to dismiss the risk of further protectionist pressure on the USD – especially under a US administration which clearly desires a weaker currency.
  • We modestly raise our USD forecasts for the summer, but remain convinced that by the end of the year – and into 2019 – structural forces will drive the dollar to levels weaker than where it currently trades today.

ING’s revised forecasts for major currency pairs – May 2018

ING. Notes: (1) Prior as of 06 April 2018; (2) *Our 2019 GBP forecasts remain under review
ING. Notes: (1) Prior as of 06 April 2018; (2) *Our 2019 GBP forecasts remain under review