Two scenarios for the US dollar in 2019

Dubai - It's worth taking stock of the other side of the coin and review a snapshot of how its rivals are performing

In 2018, the us dollar index sustained a relatively strong performance against a basket of currencies comprised of the euro, yen, pound, Canadian dollar, Swedish krona and the Swiss franc. Undeniably, it was a successful year for the bulls. The outlook for the US dollar is not so clear for 2019, judging by the Federal Reserve's caution towards interest rate hikes and increased volatility on the dollar index throughout January.
Before we go into the bullish and bearish scenarios for the US dollar, it's worth taking stock of the other side of the coin and review a snapshot of how its rivals are performing. The euro carries the most weight on the dollar index, accounting for 57.6 per cent of rival currencies' basket. The economy, which underpins the euro's performance - the eurozone - is slowing. Judging by various temperature gauges such as PMI reports, the eurozone's growth has been tampered down by slowing global economic growth fears. Weaker eurozone growth would normally translate into a weaker euro, meaning more support for the US dollar.
Like the eurozone, Japan's gross domestic product is flagging. According to November numbers, Japan's GDP declined by 0.7 per cent, meaning more headwinds for the yen and potential support for the US dollar by default. Over in the UK, growth has faced Brexit headwinds for several years now and it's showing. Manufacturing is the UK's weakest sector, dragging on overall GDP growth and slowing it to 0.3 per cent in the third quarter. Economic under-performance weighs on the pound, meaning less resistance to US dollar strength.
In Canada, there are fears of a recession on the back of high household debt and uninspiring performances in other sectors, meaning a weaker Canadian dollar versus the greenback.
Like many other mature economies, Sweden's vulnerable sector is manufacturing which has seen eroded growth in recent quarters. The krona may be undermined by a slowing Swedish economy, marking one more skittle that could be bowled over by the US dollar.
Switzerland's economy is no exception to the falling trend discussed so far. In the third quarter, investors were surprised when GDP came in at minus -.2 per cent, meaning the franc faces headwinds if weakness persists, clearing the path for potential US dollar strength.
The snapshot seems positive for the US dollar and negative for its rivals, and this might have been the case had it not been for the US government shutdown costing the economy close to $6 billion. The longest shutdown in US government history may have ended at least temporarily but the damage could amount to 0.5 per cent knocked off economic performance for the quarter. Despite the damage, the US economy is seen growing at around 2 per cent for the first quarter, so there is still reasonable support for the country's currency in the short term.
The bullish scenario for the US dollar depends on several factors, including a trade deal with China and continuing growth in the US economy. In the case that trade negotiations ended amicably, we might expect a turnaround in sentiment and reinvigorated trade relations, meaning a chance for the world's two largest economies to return to economic productivity and stability.
The bearish scenario may take place against the backdrop of China-US trade tensions starting again after March and a continued erosion of global economic growth - including US growth. Global stocks have already suffered immensely due to uncertainty and supply-chain interruptions. If this scenario develops into the second quarter, there may even be a need for the Fed to pull back further on interest rate hikes, potentially undermining the dollar.
A crucial tipping point for the greenback lies ahead in March, when the trade truce ends. Depending on the signals coming from the negotiators, we may see volatility in US dollar crosses during the month. If a trade deal is reached, I would expect the US bulls to pull ahead in the medium term. If not, then it's more likely the US dollar bears will continue to gain traction, selling off the dollar in favour of other safe-haven assets.
The writer is chief market strategist at FXTM. Views expressed are his own and do not reflect the newspaper's policy.

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