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The US dollar has slipped from its post-election highs, and strategists at MUFG see deeper falls in the buck’s future as other global economies perk up and after the “disastrous failure” of the Trump administration’s first attempt at healthcare reform.

Investors bid the greenback up sharply after the November election of Donald Trump, on the expectation that his policies would probably stir higher levels of US growth and inflation, and ultimately send rates higher compared with other major developed economies.

But the thesis has begun to break down, and that has taken the wind out of the buck’s sails. The dollar index, a measure of the currency against half-a-dozen peers, has cut its post-election advance from a high in December of 5.6 per cent, to just 2.9 per cent.

“The key [currencies] themes we highlighted for 2017 are now working against the dollar,” said Derek Halpenny, European head of global markets research at MUFG.

Among the major drivers that have now shifted are:

  • Monetary policy: Expectations for divergence between the Federal Reserve’s policy and that of other major global central banks “could remain muted for now”, after US policymakers assumed a “cautious tone” and left their forecast for three rate increases this year intact when they met last last month.
  • The reflation trade: After the election, Wall Street expectations for higher growth and inflation picked up sharply given Donald Trump’s pro-growth agenda. But “the optimism is now clearly fading in the wake of the disastrous failure of the American Health Care Act in Congress”.
  • European politics: Political risk emanating from Europe has mellowed out, stripping some of the dollar’s haven allure. “The Dutch election result and the lack of progress for Marine Le Pen in the [French] opinion polls limits upside risks for the dollar versus the euro”.

Mr Halpenny has become significantly more bearish on the dollar against the euro as a result of the shifting fundamentals. He now expects the common currency to end this quarter at $1.08, compared with his earlier forecast that the two would be at parity. By the end of the year, he expects a further rise for the euro to $1.12, from $1.08. The euro traded at $1.065 on Wednesday.

The yen is the G10 currency that is most exposed to expectations for higher inflation, according to Mr Halpenny. That means it too could get a tailwind from a dimming of expectations for the Trump administration’s success in boosting economic growth.

Mr Halpenny expects the dollar to end this quarter at ¥111, and then fall to ¥107 by the end of this year. The buck traded at ¥111.31 on Wednesday.

Copyright The Financial Times Limited 2017. All rights reserved.
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