The U.S. dollar is expected to rise against other major currencies in the first half of the year before losing ground in the second half, analysts said, as a combination of slower U.S. growth expectations for 2019 and Federal Reserve's more gradual approach toward interest rate hikes will weigh on the currency.
In a poll conducted by International Business Times, the median forecast from 10 analysts suggests the dollar will fall to 1.1843 against the euro by year-end, and will weaken to 106.56 against the Japanese yen during the same period. One analyst did not give forecasts.
Analysts said uncertainties including the U.S.-China trade war and politics in the euro area have the potential to push the U.S. dollar higher, but only in the short-term. In the second half of 2019, the U.S. dollar will slip against major currencies as the growth differentials between global economies start to converge.
"U.S.-China trade tensions, Brexit and euro area politics remain key event risks, however, each having the potential to push the U.S. dollar higher over the shorter-term," Bank of America said in its note.
The impact of a hard-Brexit will see a sharp depreciation in the pound against the majors, Michael Ferlez, economist at Moody's Analytics said. "If the trade war with China exacerbates, this could signal weaker global demand and could lead to appreciation in safe-haven currencies such as the USD and JPY. This would also lead to depreciation of currencies that depend on trade with China, such as the AUD," he added.
The Fed -- whose tightening cycle analysts attribute to being one of the key drivers for the U.S. dollar's strength in 2018 -- is largely expected to reduce the number of rate increases this year, according to an earlier poll by IBT.
Scott Brown, chief economist at Raymond James, said, "Fed tightening lifted the U.S. dollar in 2018. The Fed is expected to be more gradual in raising rates in 2019 and the economy should support a further normalization, but the risks to the growth outlook are tilted toward the downside. Accordingly, the U.S. dollar is likely to be about steady in the first half of the year, but may soften in the second half." Brown did not give any forecasts.
Repricing of the 2019 Fed tightening cycle has weighed on the trade-weighted U.S. dollar, analysts said. The trade-weighted U.S. dollar index is about 1.5 percent lower from its highs in December. It was last reported at 126.8701 on Tuesday and touched a high of 128.7636 on Dec. 19.
"Presidential pressure on the Fed, a stock market sell-off and the Fed themselves shifting toward a data-dependent approach have all contributed to the move," ING said.
Analysts also said the U.S. economic growth is widely expected to decelerate from current levels, implying a growth convergence among economies.
Bank of America said in its note, "by the end of the year the euro zone and the U.S. will be growing at potential and monetary policies will start converging. U.S. data has already started weakening, after growth peaked in Q2 last year. Euro zone data remains weak, but we believe that the bottom was in Q4 last year. We also expect a U.S.-China trade deal in Q1 this year, which will also be good news for the euro zone economy."
"We expect the combination of shifting growth and interest rate differentials - key factors that supported the U.S. dollar in 2018 - to work against it in 2019." the bank said.
USD VERSUS OTHER MAJORS
Analysts said the U.S. dollar will not sustain its 2018 rate of appreciation against most G10 currencies.
The U.S. dollar has outperformed other major currencies in 2018. The WSJ dollar index that measures the greenback's performance against 16 other currencies, gained 4.3 percent in 2018. The safe-haven Japanese yen was the only other currency to end the year positive, gaining 2 percent.
"In 2019 we will see a broad, but shallow retracement against the majors due to the fading effects of the tax legislation on repatriation by U.S. multinationals and more significantly, the potential for a pause in U.S. rate increases by the Federal Reserve," Ferlez said.
In the short term, Oxford Economics expects the EUR/USD to face more downside risk amid continuing euro zone growth underperformance. The research house remains positive on the sterling in the medium-term, however, a hard Brexit will weigh on the sterling.
Amid the uncertainties the Japanese yen is expected to gain. "The yen is likely to be the winner in this environment, as both higher volatility and slower U.S. growth will likely encourage repatriation flows," Oxford Economics noted.
The USD/CAD will continue to be influenced by oil prices, global risk appetite, trade policy developments and the broader U.S. dollar. "We think these risks are skewed in favor of USD-CAD correcting lower over a short to medium term horizon," Bank of America said in its note.
Political uncertainty in Australia ahead of new elections will weigh on the Australian dollar in the medium term, analysts said, especially if it continues to be a drag on business and consumer confidence.
However, analysts said they expect the Aussie dollar to rise against the greenback around mid-year as the Fed is expected to restart its tightening cycle in the second half of 2019. "Yet, the AUD decline should be temporary as USD will reach its peak, embark on the bear cycle from 2H19 onwards and in turn lift AUD/USD higher." ING said.