Will the Dollar Continue to Weaken?

Though the U.S. dollar has weakened in recent weeks, we expect the trend may change over the course of 2018. The dollar (as measured by the DXY Dollar Index) saw significant strength in 2014 following the Federal Reserve’s (Fed) decision to end its final quantitative easing program known as QE3; however, it was largely range bound thereafter until President Trump’s election in late 2016, as market  forecasts for fiscal stimulus pushed inflation expectations higher.

While market participants increasingly expected dollar strength moving into 2017, the dollar actually weakened, giving back almost half of its post-2014 gain, as shown in the chart below. Reasons for the weakness include: stronger than expected growth overseas (leading to strength in those currencies, and resultant weakness in the dollar); uncertainty about inflation expectations (and related uncertainty regarding the path of Fed policy); and, the potential for rising U.S. budget and trade deficits.

Even though the dollar saw weakness in 2017 and early 2018, we expect this trend may reverse. John Lynch, Chief Investment Strategist explained, “We believe that moderate dollar strength is possible over the balance of 2018, as markets gain more clarity around new Fed leadership, the impact of tax reform, and the potential for additional pro-growth fiscal policies moving forward.” We discuss this topic in more detail in this week’s Weekly Economic Commentary, “Dollar Volatility Persists.”

IMPORTANT DISCLOSURES

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results.

Any economic forecasts set forth in the presentation may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

All indexes are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment.

Investing involves risk including loss of principal.

Quantitative easing (QE) is a government monetary policy occasionally used to increase the money supply by buying government securities or other securities from the market. Quantitative easing increases the money supply by flooding financial institutions with capital in an effort to promote increased lending and liquidity.

The U.S. Dollar Index (DXY) indicates the general international value of the U.S. dollar. The DXY Index does this by averaging the exchange rates between the US dollar and six major world currencies.

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