The US Federal Reserve (Fed) is on course to raise interest rates for the fourth time in a year on Wednesday, yet the US dollar index is still down nearly 8% over the past 12 months. So, what is 2018 likely to hold for the greenback?
The past year has been a tale of weakness for the US dollar; it is down by around 10%, 1.2% and 5% against the euro, yen and pound respectively over the 12-month period.
In this time, the Federal Reserve has raised rates on three occasions, with the central bank widely expected to hike rates for a fourth time on Wednesday.
A US rate rise this week is 98% priced in by the markets, the last of three such hikes forecast by the Fed in the 2017 calendar year that would take the Fed funds rate to 1.5%.
While US economic data has been generally robust of late, inflation and wage growth has been relatively subdued.
These latter factors have led investors to believe that the Fed will take a moderate, gradual approach to rate rises in 2018, hence limiting the otherwise bullish impact on the dollar of accelerating economic growth.
US employment data released on Friday was a case in point. While non-farm payrolls rose 228,000 in November, beating economists´ expectations for 195,000 new jobs, lower-than-expected wage growth blunted the dollar´s advance.
Fed chair Janet Yellen, who steps down in February, has described US inflation as a mystery. At just 1.3%, it is well below the Fed´s 2% target and appears at odds with an economy that is growing at a highly respectable 3% pace, with unemployment at just 4.1%.
While the Fed is still expected to raise interest rates this week, an upturn in US inflation and wages would likely go a long way to boosting US interest rate expectations and by virtue, the dollar.
Markets currently anticipate two US rate rises next year, a less hawkish stance than the Fed´s official line, which is calling for three rate hikes that would match the pace of tightening seen in 2017.
Investors will be watching for signs of any change in the Fed´s assessment of the US economy´s strength on Wednesday this week, at the end of a two-day policy meeting.
At the same time, Republicans are aiming to get a final agreement on tax cuts and an overhaul of the US tax system this week as well.
Proposed tax reductions, with corporate taxes set to be cut from 35% to 20%, could provide some uplift for US growth.
With the US labour market already tight and the economy in growth mode, the year 2018 could finally be the point when US inflation takes off.
Investors, however, remain relatively bearish on the prospects for the dollar over the next year.
A poll published by Reuters last week found the consensus view of economists is for the dollar to decline 2.5% against the euro.
While this makes for relative stability compared with the 10% fall in the dollar versus the euro over the past year, it points to continuing dollar weakness.
So, why the bearish outlook on the dollar?
For one, global risk appetite in 2018 is likely to remain strong as global growth continues to pick up.
All things being equal, this phenomenon is likely to keep the dollar down in 2018, especially as many economies are playing catch-up with the US.
The IMF expects the world economy to grow by 3.7% in 2018, a slight increase from the 3.6% pace expected for 2017, which itself would mark an acceleration from the 3.2% growth rate registered for 2016.
In addition, just as global growth has picked up, there´s also been some decrease in political risk outside the US.
In Europe, there was significant risk taken off the table with the election of Emmanuel Macron as president of France, thwarting the rise of the far right.
While much uncertainty remains, recent agreement on the Brexit divorce settlement could also set the stage for possible sterling gains in 2018.
Generally strong corporate results in the third quarter across the major developed markets could translate into increased capital expenditure by firms in 2018.
In a paper published earlier this month, ING argues that investors will be chasing positive local growth stories in 2018.
The investment bank´s currency team believes some of the more economically-sensitive currencies will stand to benefit from the improving global growth backdrop.
But which currencies will benefit the most?
Citing the themes of reduced policy uncertainty, supportive liquidity conditions supporting pro-cyclical currencies, and a bullish turn in the investment cycle, ING sees the euro and various central European currencies as being among the likely strong performers in 2018.
In particular, it sees the euro and the Czech koruna as being at the centre of the sweet spot.
Further afield, it also sees the Korean won as a likely candidate for good performance in 2018, with the country set to be a beneficiary of an ongoing upswing in the global manufacturing cycle.
At the same time, there is another reason to expect further dollar weakness during 2018, as the domestic political troubles of the Trump administration appear far from over.
The dollar was initially boosted by Trump´s win in last year´s presidential election given his agenda to cut taxes and increase spending.
Repeated failure of the Trump administration to galvanise enough support to push through healthcare reform subsequently raised serious concerns over its ability to deliver the agenda.
It remains to be seen what exactly comes of the current push to reform the tax system and secure big tax cuts.
The major bugbear though is the continuing probe into the influence of Russia in the outcome of last year´s US election and its links with Republican figures – those who were instrumental in elevating Trump to the Oval office.
A key question remains whether investigators will eventually establish that Trump himself was well aware of the alleged discussions that went on between Republican figures and Kremlin representatives in the lead up to election day.
Then there is also the uncertainty that has been witnessed across virtually all areas of US foreign policy since Trump´s win.
While all eyes will be on the Fed over the next couple of days, Trump and his administration remains very much the dollar wild card.