Don’t Jump on the Dollar Bandwagon, Just Yet

The greenback’s had a banner year and while most investors predict the rally to continue to 2016, gains may be more modest than expected and that could soothe emerging market currencies.

The U.S. dollar index (USD) is poised to end 2015 with a more than 9 percent increase as expectations for the Federal Reserve to begin a tightening cycle boosted buying in the months leading up to the central bank’s historic December meeting.

Now that the Fed has lifted rates and central banks in Europe, China, Australia and Japan remain more likely to provide more stimulus, the divergence in global monetary policy is expected to further underpin the dollar.

But nearly a week since the first U.S. rate hike in a decade, the dollar recorded its fourth straight session of losses on Wednesday. That’s providing relief to battered emerging market currencies: The Indonesian rupiah spiked 1 percent on Tuesday to a one-month high, notching a fourth straight day of gains, while the Indian rupee is also trading close to its best levels in nearly a month.

Several market players, including Citi and National Australia Bank, are anticipating only around 5 percent gains for the dollar next year, compared to Deutsche Bank’s 10 percent.

Historical evidence also supports the case for a milder rise in the dollar next year.


Craig Erlam
Based in London, England, Craig Erlam joined OANDA in 2015 as a Market Analyst. With more than five years' experience as a financial market analyst and trader, he focuses on both fundamental and technical analysis while conducting macroeconomic commentary. He has been published by The Financial Times, Reuters, the BBC and The Telegraph, and he also appears regularly as a guest commentator on Bloomberg TV, CNBC, FOX Business and BNN. Craig holds a full membership to the Society of Technical Analysts and he is recognized as a Certified Financial Technician by the International Federation of Technical Analysts.