Dollar’s Decline Will Be the “Wild Card” Play of 2017

Next to Donald Trump’s economic policies, one of the most spirited economic debates at the moment involves which direction the dollar will move in the coming months. While Goldman Sachs is predicting the dollar and euro will reach a value equivalency by Q4 of 2017, other analysts see the greenback trending downward next year.

The dollar has risen 4.4% against the euro and 2% against a basket of world currencies since Trump’s win on November 8, according to Fortune.  Big moves within securities and bonds markets since Trump’s victory are creating a general sense of uncertainty, making predicting anything a difficult task.

But for market veterans like Jim Paulsen of Wells Capital Management and Peter Schiff of Euro Pacific Capital, the dollar’s demise is clear given inflationary anticipations mixed with short and long-term interest rate increases.

Paulsen recently described the weakening dollar as “the big wild card in 2017,” according to CNBC, and stating, “As inflation expectations go north, that’s a deterrent and a negative for the US dollar,” he said. Underpinning Paulsen’s theory are historical trends in funds rate increases. “There [have] been five major increases in the funds rates since the 1970s, and every one of them, when the Fed raised rates, the dollar came down.”

Schiff said he sees higher interest rates, stemming from inflationary pressures, as detrimental to the dollar. Despite the spike in bond yields, investors seem to be looking to Trump’s fiscal stimulus and tax cuts to provide demand side pressure, increasing consumer spending. Schiff explains:

“So far the stock market is remaining oblivious to the spike in bond yields because they think the stimulus that might result from tax cuts and spending increases will be enough to offset the drag of higher interest rates. I think they are woefully mistaken.”

Paulsen also sees at a weak dollar providing a good opportunity for international investments. A weak dollar means US exports will be less competitive. Overseas markets could benefit as a result. Paulsen provides his analysis:

“I think those markets are under-owned, they’ve under-performed for several years … They’re better relative values,” Paulsen said. “They have younger earnings cycles than the more mature cycle in the United States. They’re going to have longer policy support than the United States will.”

A weak dollar will mean gold is likely to grow in value. Schiff thinks the recent drop if bullion’s price is only a head fake, stating: “people who are betting on the dollar and betting against gold have no idea the impact of higher interest rates. Buying gold and silver in the coming weeks could put investors looking to diversify their portfolio ahead of the curve.

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