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Not even three interest rate hikes from the Fed or the highly-anticipated tax reform package was enough to lift the Greenback’s spirits last year! Here’s how it fared against its rivals:

 

Dollar bears painted the town red for the most part of 2017, chalking up the biggest loss versus the euro then against the pound. The Kiwi managed to scrape by with a tiny 2.15% win, and that’s even with a bunch of market factors like falling global dairy prices and a political shakeup to contend with!

USD Index 2017

As you can see from the year-to-date dollar index above, the slide was nearly nonstop for the first three quarters, only pulling up for some air in September and October.

But of course this doesn’t paint a complete picture as USDX is heavily weighted against the euro (57.6%), followed by the Japanese yen (13.6%) and sterling (11.9%). Let’s take a look at how it fared against the yen and European currencies first:

USD/JPY price action was mostly sideways while the euro and pound had a steadier pace of gains. These European currencies actually bottomed out to the dollar right at the turn of the year, probably shaking off the negative vibes from the EU referendum in 2016 and focusing on improving data points instead.

Here’s how the dollar moved against the commodity currencies:

The Aussie, Kiwi, and Loonie were off to a bit of a rocky start but managed to stage stellar rallies around the middle of the year, with the Kiwi returning a huge part of these gains until November.

So why was the dollar nearly defenseless against its counterparts? And if tightening and tax reform can’t boost the Greenback, what will?

First off, you gotta remember that market gurus have already been buzzing about 2017 rate hikes for more than a year already. Think about it as setting expectations higher and higher for Taylor Swift’s next album, only to have its first lead single be dubbed as “Disney-villain karaoke” and the next one just as harshly criticized. Can’t quite catch a break, huh?

Because of that, you can imagine how dollar traders must’ve been quick to hit the sell button the moment a disappointing piece of data gets released. To top it off, the FOMC has been dancing the tightening tango themselves, with several members highlighting the uncertainty surrounding upcoming data and the potential risks from the Trump administration.

And that brings us to the main factor that kept dollar bulls in hiding for months on end…

From building his infamous wall (that Mexico will pay for!), to his jabs at North Korean leader Kim Jong-Un, to renegotiating NAFTA, to the GOP’s failure to repeal Obamacare, to covfefe, to his alleged dealings with Russia, and so on… There was no shortage of surprises and political gaffes that kept traders hesitant to pile up their long dollar holdings, even in risk-off situations.

In a nutshell, 2017 for the Greenback was a nasty combination of buy-the-rumor-sell-the-news action on Fed tightening and fiscal reform, more weight on disappointing data versus upbeat results, and the “Trump effect” that left the dollar the last pick in gym class. 

Looking ahead, however, this “Trump effect” could take on a different meaning now that the tax reform would be underway soon. Apart from giving a big boost to corporate America, it could also keep the Fed on its tightening track for the next few months.

Think 2018 will be the Year of the Dollar or still the Year of the Dollar Disappointment?