A more measured dollar rally

Jan 17, 2017 / By Richard Turnill

Key points

  • We expect the U.S. dollar to rise this year, albeit at a slower pace than in the recent past and with bumps along the way.
  • The U.S. dollar weakened after President-elect Donald Trump’s first media conference, losing a third of its post-election gains.
  • This week may bring more signs of global reflation, updated Federal Reserve rate expectations and more Brexit clarity.

We expect the U.S. dollar to grind higher this year. But the pace of the greenback’s rise is likely to moderate, with spates of volatility like last week’s drop following Trump’s first media conference since winning the election.

Yield differential and the U.S. dollar, 1990-2017

Yield differential and the U.S. dollar, 1990-2017

Sources: BlackRock Investment Institute. Federal Reserve and Thompson Reuters, January 2017. Notes: The U.S. dollar is represented by the Federal Reserve broad nominal trade-weighted index. The yield differential is based on the difference between U.S. and German two-year government bond yields.

U.S.-led economic reflation, Federal Reserve rate increases and expectations of fiscal stimulus are likely to widen the gap between U.S. and overseas interest rates. A higher yield differential in favor of the U.S. has in the past typically spurred more foreign purchases of U.S. bonds, supporting the U.S. dollar, as the chart shows.

Running on fumes?

Currency trends can be long-lasting. Yet we see a more measured dollar rally ahead, after a nearly four-year run that has already lifted the greenback close to all-time highs on a broad trade-weighted basis.

Various estimates of the dollar’s fair value, based on economic fundamentals, now find it about 15% overvalued. Corporate tax reform proposals in the U.S. could prompt significant expectations for further dollar appreciation, driven by the potential impact on trade and the repatriation of corporate profits held overseas. Yet there is still great uncertainty around the details, timing and potential impact of the incoming Trump administration’s policies. Bottom line: We see potential for currency volatility ahead, but little risk of a sharp and disruptive dollar rally.

Rapid gains in the dollar would be a key risk to U.S. corporate earnings. A mild rise would limit the damage, as well as any potential spillover effects to countries and companies with dollar liabilities. Big declines in many emerging market currencies have helped narrow current account deficits in the emerging world, making countries more resilient to bouts of dollar strength. Lastly, yen and euro weakness against the dollar is partly why we recently upgraded our views on Japanese and eurozone stocks.

Date: Event
Jan. 17 UK Prime Minister Theresa May speech on Brexit
Jan. 18 Eurozone, U.S. Consumer Price Index (CPI); Fed Chair Janet Yellen speech on economy
Jan. 19 European Central Bank (ECB) meets; Yellen speech
Jan. 20 China industrial production, retail sales; Trump inauguration

The ECB is likely to keep policy unchanged, looking past a recent pickup in headline inflation. Yellen’s comments may influence expectations for the pace of rate hikes. Any signs the UK will leave the single market could trigger a further fall in the pound.

  • The dollar gave up a third of its post-election gains after Trump offered little policy details in his Jan. 11 media conference. U.S. small business confidence hit a 12-year high.
  • Expectations for monetary tightening grew after China’s December Producer Price Index jumped the most in more than five years, and credit grew faster than expected.
  • The Italian Constitutional Court voted to block a referendum to roll back labor reforms, while the British pound slid on fears of a “hard Brexit.”

Global snapshot

Weekly and 12-month performance of selected assets


EquitiesWeekYTD12 MonthsDiv. Yield
U.S. Large Caps -0.1% 1.6% 20.3% 2.1%
U.S. Small Caps 0.4% 1.1% 37.9% 1.5%
Non-U.S. World 1.0% 3.0% 15.3% 3.1%
Non-U.S. Developed 0.8% 2.6% 10.3% 3.3%
Japan 0.7% 3.1% 11.5% 2.0%
Emerging 1.7% 3.9% 25.8% 2.7%
Asia ex-Japan 1.9% 4.5% 19.4% 2.6%
BondsWeekYTD12 MonthsYield
U.S. Treasuries 0.2% 0.4% 0.2% 2.4%
U.S. TIPS 0.5% 0.7% 4.9% 2.2%
U.S. Investment Grade 0.3% 0.6% 5.8% 3.3%
U.S. High Yield 0.2% 1.2% 19.9% 5.8%
U.S. Municipals 0.7% 1.2% 0.6% 2.5%
Non-U.S. Developed 0.7% 0.5% 1.6% 0.8%
Emerging Market $ Bonds 0.3% 1.7% 13.0% 5.6%
CommoditiesWeekYTD12 MonthsLevel
Brent Crude Oil -2.9% -2.4% 82.9% $55.45
Gold 2.1% 4.3% 9.5% $1,197
Copper 5.7% 6.7% 34.5% $5,909
CurrenciesWeekYTD12 MonthsLevel
Euro/USD 1.1% 1.2% -2.2% 1.06
USD/Yen -2.2% -2.1% -2.7% 114.49
Pound/USD -0.9% -1.3% -15.4% 1.22

Source: Bloomberg. As of January 13, 2017. Notes: Weekly data through Thursday. Equity and bond performance are measured in total index returns in U.S. dollars. U.S. large caps are represented by the S&P 500 Index; U.S. small caps are represented by the Russell 2000 Index; Non-U.S. world equity by the MSCI ACWI ex U.S.; non-U.S. developed equity by the MSCI EAFE Index; Japan, Emerging and Asia ex-Japan by their respective MSCI Indexes; U.S. Treasuries by the Bloomberg Barclays U.S. Treasury Index; U.S. TIPS by the U.S. Treasury Inflation Notes Total Return Index; U.S. investment grade by the Bloomberg Barclays U.S. Corporate Index; U.S. high yield by the Bloomberg Barclays U.S. Corporate High Yield 2% Issuer Capped Index; U.S. municipals by the Bloomberg Barclays Municipal Bond Index; non-U.S. developed bonds by the Bloomberg Barclays Global Aggregate ex USD; and emerging market $ bonds by the JP Morgan EMBI Global Diversified Index. Brent crude oil prices are in U.S. dollars per barrel, gold prices are in U.S. dollar per troy ounce and copper prices are in U.S. dollar per metric ton. The Euro/USD level is represented by U.S. dollar per euro, USD/JPY by yen per U.S. dollar and Pound/USD by U.S. dollar per pound. Index performance is shown for illustrative purposes only. It is not possible to invest directly in an index. Past performance is not indicative of future results.

Asset class views

Views from a U.S. dollar perspective over a three-month horizon

Table: Asset class views from a U.S. dollar perspective


Richard Turnill
Managing Director, Global Chief Investment Strategist

Richard Turnill, Managing Director, is Global Chief Investment Strategist for BlackRock, leading the Investment Strategy Function within the BlackRock Investment Institute ...

Isabelle Mateos y Lago
Chief Multi-Asset Strategist
Kate Moore
Chief Equity Strategist

Kate Moore, Managing Director, is Chief Equity Strategist – Americas for BlackRock and is a member of the BlackRock Investment Institute. She is responsible for developing ...

Jeffrey Rosenberg
Chief Fixed Income Strategist

Jeffrey Rosenberg, Managing Director, is BlackRock's Chief Investment Strategist for Fixed Income. His responsibilities include working closely with the Chief Investment ...