U.S. Dollar Setting Up to Disappoint in 2018
Investors beware: the U.S. dollar could be losing a lot of value in 2018. The greenback is facing a lot of headwinds, and this could really impact its value.
There are three things that could be driving the value of the dollar lower. These factors are tax cuts, reliance on the dollar, and other currencies doing well.
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1. Tax Cuts Bad for the Dollar
Here’s the thing: investors are loving the tax cuts by the Donald Trump administration. This is because, going forward, American companies could be paying a lot less in taxes. So their profitability will increase and, as a result, their stock prices could jump higher.
Great.
But no one is talking about the other side of the equation. What happens to the U.S. government?
You see, because of lower taxes, the U.S. government could be finding itself short of money. Prior to the tax cuts, the government had been running deficits year-over-year anyway.
Now, thanks to the new tax cuts, the deficits could get much bigger. It wouldn’t be shocking to see the U.S. government registering $1.0-trillion deficits in a few years.
With this in mind, know that deficits are not good for the U.S. dollar. If you recall, back in 2010–2012, the government’s deficits were soaring and it was impacting the value of the dollar.
2. U.S. Dollar Losing Dominance
Understand that there’s a new currency emerging: the Chinese yuan. It is making a solid stride to challenge the value of the U.S. dollar.
One of the biggest reasons the dollar is called the greenback is that global trade is primarily done in the U.S. dollar, and commodities like oil are priced in dollar terms.
This is changing.
China is planning to launch yuan-based oil futures contracts in early 2018. Even The Wall Street Journal admits this could be bad for the dollar. It says, “A yuan-denominated oil contract could also challenge the role of the U.S. dollar—currently the dominant commodity-pricing currency— by making it possible for crude exporters to sell the oil in another currency.” (Source: “China to Shake Up Global Market With Yuan-Based Oil Futures Contract,” The Wall Street Journal, December 20, 2017.)
As for global trade, countries are opting for trading in yuan.
The most recent example of this could be trade between China and Pakistan. Both countries could now be trading in goods valued in yuan, not in the U.S. dollar. (Source: “China and Pakistan to use yuan in bilateral trade,” South China Morning Post, January 3, 2017.)
If the U.S. dollar isn’t being used as often, won’t it lose its value?
It’s possible.
3. Other Currencies Doing Well
The last reason why 2018 could be bad for the U.S. dollar is that other major currencies are doing exceptionally well.
Consider the euro index below, for example. It tracks the value of the euro relative to other major currencies.
Chart courtesy of StockCharts.com
Over the past year, it has seen a massive move to the upside, and the trend says it could go much higher.
Don’t forget, if other currencies do well, investors will just sell their dollars and buy currencies that are doing well. Obviously, the selling would impact the value of the U.S. dollar.
U.S. Dollar Outlook for 2018: Bearish at Best
Dear reader, as it stands, there are too many factors working against the dollar. In 2017, the U.S. dollar index dropped roughly 11%. This happened as the Federal Reserve was raising rates and the U.S. economy showed stellar performance.
In 2018, it wouldn’t be shocking to see the decline continue. Don’t rule out a decline similar to last year’s just yet.
Mind you, if the dollar declines further in value, look very closely at gold. It’s the ultimate hedge for currency depreciation.
