A persistently weak dollar is confounding currency traders and roiling global financial markets.
Investors across asset classes are feeling the effects of the buck’s rocky start to the year, with the ICE U.S. Dollar Index DXY, -0.06% a measure of the currency against six major rivals, dropping 3.5% in the year to date, adding on from its 10% loss last year. Last week alone, the buck dropped 1.7%.
So what’s been driving the dollar? Here are the two main culprits:
Central bankers and the new gang at the Federal Reserve
Central bank policy is thought to be one of the biggest drivers of currencies, so the Fed’s hawkishness and expectations for three rate increases in 2018 seem to contradict the buck’s soft performance. But it might be a case of the grass being greener on the other side. of the pond.
“The market thinks it knows what the European Central Bank is going to do and it’s nervous about the Fed’s new regime,” argued Steven Englander, head of research and strategy at Rafiki Capital Management.
The ECB is lagging behind the Fed in ending its quantitative easing program and raising interest rates, but hawkish expectations paired with strong economic data have made the shared currency more attractive, allowing it to strengthen versus its U.S. rival.