The Dollar managed another advance through the final three-month period to close out 2018. Though, activity through the quarter was somewhat misleading as the fundamental backdrop was exceptionally tumultuous with several conflicting themes and complications making it difficult for the market to establish a clear beat on what exactly would prevail in establishing a trend for the world’s most liquid currency.

Heading into 2019, the Greenback will continue to be buffeted by systemic crosswinds that could cater to its more elementary fundamental roles or alternatively see capital diverted by unique stability risks. One thing looks certain, the first quarter of the new year will be facing an environment of high volatility. That is the investor term for ‘uncertainty’, which holds obvious risks but also a few possible benefits. The political and geopolitical environments represent more profound risk to the US economy and currency, while more traditional considerations of cooling GDP could further undermine the Federal Reserve’s intentions to further tighten policy. On the other hand, with utter fear comes the panicked demand for absolute liquidity for which the Dollar still holds the undisputed title. When it comes to projecting the US currency’s course, a healthy appreciation of the technicals and the question “just how intense are market conditions” will prove the best compass.

POLITICAL RISKS ARE BUILDING BETWEEN TRADE WARS AND INTERNAL GOVERNMENT STANDOFF

When money is at stake, emotions can run high. Successful investing often depends heavily on removing emotions from decision-making to instead fall back on balanced analysis, an empirically-derived trading strategy and sound money management. In the strata of those topics that can aggravate sentiment, politics is arguably one of the most provocative. As such, it is best to keep politics out of your evaluation for the market environment unless it holds an obvious and systemic influence over the health of the economy and financial system. We seem to be facing exactly those circumstances.

International relations with the United States have been the more transparent burden on the system. The US-China trade war found a brief respite through the end of 2018 with an agreement between the two countries to a 90-day ceasefire on further tariffs. Yet, what encouragement that may produce that real progress can be forged without the crushing uncertainty of ‘what’s next’ hanging over the discussions is thin. The demands from the US are lofty for a country struggling to balance financial stability and an economic landing. Further, the chances that the US begins a new line of taxes on closer economic allies (say, auto tariffs on Europe and Japan) is high should local economic pain increase or those countries not comply with policies like those being pressured on Iran.

More difficult to read for market impact is the fallout from local political issues. The government shutdown brinkmanship through the end of 2018 was only a taste of what we likely face in the year ahead. With Democrats taking over the House of Representatives, government dysfunction will only increase. US President Donald Trump was already clashing with Congress over the past few years and that was with a government all under the same party. Matters such as further tax cuts, an infrastructure spending program and a ballooning deficit will likely grind at the detriment of the US economy and the Dollar. Then there is the constant speculation over the potential for the Legislative branch to bring impeachment proceedings up for the President. It is still a low probability, but the mere mention will add to the backdrop of constant uncertainty.

DOLLAR CREDIT QUALITY MAY BE A MORE PROXIMATE RISK THAN PREVIOUSLY FEARED

A final consideration that we’ve been keeping tabs on, but which may prove more tangible than previously thought, is the pace at which the Dollar will lose ground as the principal currency for global reserves, business and investment. The world has slowly attempted to diversify away from the Greenback for years with intent jumping sharply following the Great Financial Crisis when global leaders reeled from the transmission of what they thought was a US-based implosion in credit markets. Yet, there was little reason to hasten the effort as the rise of the Chinese Yuan was slow, the Euro kept facing existential threats from discontent Eurozone members, the Pound dealt with a convoluted Brexit and the Yen floundered under unrelenting deflation. Yet, the acute protectionist shift from the US government amid trade wars and the lingering threat of credit quality degradation as the deficit explodes can produce a financially-determined shift away from the Dollar instead of a political one. The Greenback accounts for nearly three quarters of FX transactions and it will not lose its number one slot for a long time. However, the upheaval in capital redistribution will not wait for that late power shift to divert. The tipping point in speculation comes much, much earlier.