Where is the US Dollar heading?

One of the major developments in 2018 has been the continued divergence between US economic data, which so far has been very strong, relative to the rest of the world in particular the Eurozone, China and Japan.

Concerns about trade war and a negative outlook for emerging markets has pushed more inflows into the US which has led to more strength of the US dollar.

An interesting gauge to understand the underlying economic activity is the Citi US/G10 data change index (also known as economic surprise index). This index measures actual performance of economic data compared to consensus forecasts. A higher measure implies that economic data in the US has been stronger than what was forecasted against other G10 countries.

Historically, the difference between the US and G10 data change index has been good at explaining the six-month movement of the dollar. As we can see from the chart, whenever the difference between the US and G10 data is positive, the dollar tends to strengthen.

At the moment, the US/G10 reading remains solid in positive territory and this suggest that dollar strengthening may persist for a while longer.

That being said however, US economic leadership is likely to lose some traction over the next couple of months as the boost from tax cuts start to fade and inflationary pressures begin to hurt consumers.

It is therefore plausible that the turning point for the US Dollar is imminent.

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