• The US dollar had been the strongest of the major currencies in 2018 with the strongest economy, the tightest monetary policy and by far the highest interest rates. As the worlds reserve currency, the safe haven effect always helps as well. The consensus view is that the dollar is expected to remain firm in the near term but to weaken later in the year now that rates have peaked in the US and (maybe!) policy incrementally tightens elsewhere. Given the weakness of the Eurozone this feels far from a given and we are not expecting any significant dollar weakness in 2019.
  • We always say that the vast, liquid and binary FX market is the quickest and easiest way for investors to take a view on anything, economic or political.
  • Sterling is the most obvious example of this being, as ever these days, a hostage of fortune to Brexit. Ever since the vote in 2016 the pound has tended to fall on ‘hard deal’ or ‘no-deal’ fears or rise on ‘soft deal’ hopes. Sterling has strengthened by around 3% this year as a ‘no deal’ has (supposedly!) been taken off the table and the markets are pricing in either a softish Brexit or long extension. Thus, there is probably little upside in sterling but the potential for a fall of up to 15% should the UK crash out in a disorderly manner.
  • In line with the ‘risk on’ sentiment last quarter, EM currencies showed some strength against the US dollar, though only to the extent of 2% or so after some big falls last year.

Summary: As we always say, forecasting currencies is a mugs game but, this notwithstanding, we would expect the US dollar to remain relatively firm for most of the year before maybe softening towards the end of year. Sterling remains a hostage of fortune to Brexit.

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