Just a few hours of the new trading year was all it took to confirm one of the more confident of investors' assumptions pre-Christmas, that 2018 would be another difficult year for the dollar. While Americans were sleeping off their new year's day hangovers, data out of the eurozone revealed record manufacturing growth and drove the euro to near three-year highs against the dollar.
If the dollar could talk it would be shouting about a market overreaction. Indeed, the dollar fought back with strong data from America's own manufacturing sector as well as rising yields. Even so, the new investor mood is dollar negative. It may serve the discerning investor to await further evidence, such as Friday's US jobs report.
But it would be no surprise if positive data outcomes in general were met with market indifference. Investors are setting a high bar for the dollar given how fast the global economy is growing and expectations about G10 central banks outside the US moving towards monetary normalisation.
The Fed could deliver on its planned rate hike assumptions this year and still do little to reverse dollar weakening, says one currency analyst. Meanwhile, the bar for the euro is lower. Smaller upsides in eurozone data are likely to be well received. A European Central Bank rate hike may not happen until 2019, but another currency analyst says the market is likely to price in liquidity tightening from the ECB well before it is announced.
And add in the arrival of the dovish leaning Jay Powell as Fed chair, plus the US midterm elections and you have a suite of reasons for further dollar depreciation. As for potential Europe banana-skins, such as the Italian elections and Germany's coalition talks impasse, investors appear fairly sanguine.
You wouldn't bet your house on the first market shifts of a new year. After all, dollar bulls need a little reminding how the first flush of 2017, when the euro was driven down to $1.03 turns sour as the dollar declined. The market is heavily positioned behind a euro rally, so a similar currency reverse will be just as painful. But this time, it doesn't look likely.
