2017: A Good Year for the US Dollar

Good Morning All;
as the holidays draw near, we have seen very little consistency in the performance of the U.S. dollar. The greenback lost value today versus the euro, Japanese Yen and Swiss Franc but strengthened against sterling and the commodity currencies.  Even with these back and forth movements, we are still seeing more profit taking than new positioning in the dollar.  Of course this isn’t a surprise as overstretched moves ahead of a major holiday invites liquidation.  Better than expected U.S. existing home sales and the London close drew some buying interest but as the North American session progressed, profit taking resumed.  We could see one final jolt of volatility with tomorrow’s revisions to third quarter GDP, initial jobless claims, durable goods, personal income and spending reports scheduled for release and after that, the markets will be on full holiday mode until Tuesday when we could see some additional action before year end. 
Short-term price action aside, with the Federal Reserve looking to raise interest rates three times next year, 2017 should be a good year for the U.S. dollar unless the strong dollar kills corporate earnings, Trump tantrums overshadow Trump stimulus and the Fed raises interest rates two instead of three times next year.  Time and again we’ve heard U.S. companies attribute earning misses to currency translations. 
A strong currency hurts corporate earnings by reducing the value of foreign profits and making U.S. exports less competitive on the global market.  According to Factset data, 30% of U.S. based S&P 500 firms draw over 50% of their revenue from outside the U.S. and the value of this revenue is now less in U.S. dollar terms.  We were having this same conversation this time last year when USD/JPY was trading above 120.  The strong dollar was also a big problem then and in less than 6 months it sank down to 100.  
Considering that there are no less than 10 reasons why the dollar is headache (list below) we hope you can understand why it would be dangerous to expect an uninhibited rally in the dollar next year especially since it’s a crowded view.  At the same time, if there are any delays to Donald Trump’s fiscal stimulus program or there are signs that it may not be as aggressive as he promised, the rally in stocks and the dollar could be unwound. Any of this could lead to less tightening from the Federal Reserve next year.  Of course if none of this becomes an issue it should be smooth sailing to 120 for USD/JPY – a level that we still expect to be reached some time in the coming year.
Consequences of a Strong Dollar:
1. Less Exports, More imports, Wider Trade Deficit
2. Lower Inflation
3. Lower Commodity Prices
4. Weaker Earnings for US Companies with Significant Foreign Revenue
5. Less Pressure on Major Central Banks like ECB to Ease
6. More Pressure on Emerging Market Nations with Dollar Denominated Debt
7. More M&A Transactions (which may not be a consequence)
8. Weaker International Investment Returns
9. More Pressure to Outsource
10. Less Demand for Currency Alternatives such as Gold and Bitcoins

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