One of the key economic and market themes of 2018 has been the strength of the US Dollar. The main drivers for the US Dollar have been the strength of the US economy and the divergence of monetary policy between the US and the other major economies.
The US Federal Reserve (Fed) is expected to increase interest rates two further times in 2018. Given the strength of the US economy, it is highly likely that the first increase will be at the next Fed meeting, which is at the end of September.
However, at some point the Fed may begin to worry about the negative impact the tightening of monetary policy and the trade tensions between the US and China could have on the economy. Therefore, it is less likely that the Fed will raise interest rates a second time before the end of the year.
Market expectations about the Fed’s policy tend to have an impact on the strength of the US Dollar, and if they decide to delay the second interest rate rise, the US Dollar may not be as strong as we approach the New Year.
A key indicator to the strength of the US Dollar could be the Fed’s September meeting notes, particularly regarding their outlook for interest rates.