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.