A quick look at the U.S. dollar index reveals that the U.S. currency tossed and turned for the most part of the past 12 months, as market sentiment and expectations were pretty fickle then. But even though 2015 didn’t quite turn out to be the Year of the Dollar: Part II, a couple of market factors still kept the Greenback supported against its forex peers.
Fed liftoff expectations
With the Fed completing its taper process in the previous year, forex market participants turned their attention to the next logical step, which is an interest rate hike. This made the U.S. central bank the only rose among the thorns, as other monetary policy officials across the globe held on to their easing bias.
However, FOMC officials weren’t in the mood for a rate hike early on in 2015, citing that they’d like to see stronger evidence of jobs growth and a pickup in inflation first. Unfortunately for the U.S. dollar, employment data and CPI readings around the middle of the year looked as bad as Big Pippin’s grades in Home Ec, leading investors to push back their tightening forecasts from June to September then to December.
Even though the delay in rate hike expectations dulled the dollar’s shine in Q2, the safe-haven currency was still able to draw support from risk aversion when the slowdown in China and emerging markets hogged the spotlight. The commodity price slump also had investors moving funds away from higher-yielding assets to the lower-yielding dollar, although the Greenback’s gains were capped by weakening U.S. inflationary pressures.
As you can see from the U.S. dollar index chart above, its 2015 performance wasn’t so bad but it looked like a lousy sequel to the previous year’s blockbuster. Scrolling further back to 2013 reveals that the year of taper expectations was filled with forex consolidation and that the bullish momentum kicks in the following year. Do you think we’ll see another strong forex performance from the Greenback in 2016?