Date
10 December 2016
Historically, the US dollar typically moved in opposite direction to commodity prices, but next year could be an exception. Photo: Reuters.
Historically, the US dollar typically moved in opposite direction to commodity prices, but next year could be an exception. Photo: Reuters.

Dollar index could surge to 107 next year

The US dollar index broke out of its previous range following Donald Trump’s election victory and has posted sharp gains since then.

Is the greenback poised to rise further?

At the moment, the consensus is for the dollar to stage further rally amid widespread expectations that the president-elect’s stimulus plan will lead to higher inflation and subsequently higher US interest rates.

As I have mentioned before, the US dollar trend largely depends on the relative tightness of the US monetary policy compared to that of other countries.

If Trump could push through his economic initiatives, that could quicken the pace of rate hikes by the Federal Reserve.

Meanwhile, it’s hard to imagine Europe and Japan dropping their easy money policy next year, given their sluggish economies.

Such a policy divergence is going to underpin the bullish trend of US dollar.

Technical charts point to 107 as the upside target for the dollar index.

Net long positions of the dollar index has been rising, but not as much as the level seen during the previous round of dollar gains, suggesting some speculators are still cautious and doubtful if Trump’s policy ideas will actually be implemented.

In a stronger dollar scenario, companies that generate a large proportion of their income from the United States may outperform.

Out of the 2,000 Hong Kong-listed firms, 67 companies generate at least a fourth of their revenue from the US market. These firms are likely to benefit from a strong dollar.

The outlook for commodities and natural resources stocks is mixed.

In the past, they tended to move in opposite direction to the dollar, so a stronger dollar implies weaker commodity prices, and thus poor performance from operators in the field.

But recently, commodities have outperformed as investors expect the US to expand infrastructure spending next year, which would lift demand for commodities such as metals and reignite inflation as well.

So next year, the US dollar and commodities could move up in tandem, a departure from the general pattern seen over past 15 years.

Nevertheless, the situation could be more complicated and there are many possible scenarios.

One of them is a dollar surge could lead to capital outflows from emerging economies, pushing them to sell more resources, thus putting downward pressure on commodity prices.

This article appeared in the Hong Kong Economic Journal on Dec. 1.

Translation by Julie Zhu

[Chinese version 中文版]

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RT/CG

Hong Kong Economic Journal chief economist and strategist

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