As bearish sentiment spread across financial markets the ‘safe haven’ currencies showed the best performance last year with the US dollar and the yen leading the way. The euro and sterling suffered from political dysfunction, the emerging markets currencies from economic and in some cases political concerns.
America has easily the highest interest rates in the developed world and the economy is relatively strong so it was no surprise that the dollar was the strongest of the major currencies last year. Trump may seem a political risk to you and me but the markets continue to see the dollar as a safe haven so the shenanigans in Europe centred on Italy and Brexit further aided the greenback. But there are warning signs; both the US trade and budget deficits are rising quickly and with a more dovish Fed now saying that interest rates are ‘close to neutral’ and US growth predicted to slow sharply this year we would expect the dollar to soften.
Sterling has a Brexit bedevilled and very rocky 2018 falling by 9% against the yen, 6% against the US dollar but just 1% against its partner in crime the euro. Its future direction will be determined by the pantomime in the Palace of Westminster; a crash-out Brexit will send the pound spiralling lower, something softer or indeed a Brexit postponement or no Brexit at all would lead to a rally.
A sobering thought is that sterling’s recent travails are just another sad episode in sterling’s decline from 1945 during which time it has lost two-thirds of its value against a basket of major currencies.
No end in sight for the Bitcoin bear market with the crypto currency now trading below US$4,000, down from US$20,000 a year ago.
Summary: Forecasting currencies is a mugs game but, this notwithstanding, we would expect the mighty US dollar to soften eventually this year. In the short-term sterling and to an extent the euro are a hostage to Brexit.