HSBC: The ‘euphoria’ surrounding the dollar will end once reality sets in

The US dollar has been on a roll since President-elect Donald Trump’s win in early November.

The greenback rose against most major developed and emerging-market currencies in the aftermath, and the trade-weighted dollar index was hovering near 102.64 on Wednesday — near 14-year highs.

At least part of that appreciation could be attributed to the markets reacting to Trump’s proposed fiscal policy initiatives. And analysts had argued last month that the currency still had some room to roar going forward.

A team at HSBC led by strategist David Bloom echoed the sentiment in a recent note to clients, noting that the team expected dollar strength to continue through the first half of 2017. It argued however, that the “euphoria” would start to fade halfway through the year.

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“We believe too much will be priced in to the currency market in terms of a successful reflation trade,” the team wrote. “The USD rally will reverse as belief in Trump-flation turns to realization that the scale of policy overhaul is relatively modest (‘Trump-lite’), and that the results are underwhelming as a consequence (‘Trump-failure’). We expect a retracement from mid-year to the end of the year.”

Screen Shot 2017 01 04 at 12.18.15 PMHSBC



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