“We are not convinced that the USD trend can change until either inflation data pick up in the US or a more concrete tax reform agenda is observed,” that’s the key takeaway from a new report from foreign exchange analysts at Swiss bank Credit Suisse on the state of global currencies.

Even after three interest rate hikes, and confirmation from the Federal Reserve that it will start to unwind its balance sheet over the next few months, the ICE dollar index, which measures the greenback’s performance against six of its principal rivals, has shed more than 10% of its value this year, plunging to a two-and-a-half year low.

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Tax Reform Agenda Driving Dollar Moves 

According to the Financial Times, the primary driver of the dollar's decline this year has been "a narrowing of the differential in market expectations for economic growth and monetary policy." With the implied market probability of a December rise having fallen sharply, traders are now concentrating on economic performance overseas. Indeed, Credit Suisse notes that this year "Positive global growth surprises have tended to come from the euro area, Japan, and EM space, not the US." Meanwhile, as the US falls behind regarding growth, other key G10 banks have "either been hiking aggressively (for example the Bank of Canada) or have intimated that they will soon tighten policy (for example the ECB)."

The euro has become one of the best-performing currencies against the dollar because of the hawkish rhetoric from the central bank. And Draghi has been happy to let the currency strengthen. The analysts note that in ECB minutes and speeches, "the central bank spends much more time discussing why EUR strength is not a problem" and policymakers have commented that "a stronger exchange rate need not lead to disinflation pressures if at the same time low-interest rates and a strong economy are allowing for decent growth outcomes and greater pricing power from those angles." These statements seem to imply that the ECB is more than happy to let the euro strengthen further against the dollar and are in no rush to talk it down.

With the focus on growth around the rest of the world, only strong economic data can change the course of the dollar according to Credit Suisse:

"For the weak USD trend to turn ahead of the September 20 FOMC, in our view there needs be a strong upside surprise for US inflation data (starting with Aug PPI and CPI this week) or tangible progress on tax the much-heralded tax reform agenda. "

Tax Reform Agenda