Although the US dollar benefited from the proposed fiscal measures of the new Trump administration while riding the tailwinds of impending rate hikes from the Federal Reserve, the significant uncertainty that lies ahead will continue to make the dollar a volatile trade. However, the ambiguity is not just limited to policy, but also the economy as data comes in more mixed. Rising interest rates combined with a US dollar that has been on a tear the last few months are already exhibiting measurable impact on economic activity.

With the latest spending and consumption data out, combined with figures from the housing sector, there are numerous signs that challenges lie ahead for the currency.Furthermore, comments by both President Donald Trump and his nominee for Treasury Secretary Steven Mnuchin continue to highlight the perception among key policymakers that the dollar is overvalued.However, despite these comments, the strengthening economic outlook could continue to contribute to dollar strength over the medium-term.

Uncertainty Sees the Dollar Dip

There are many different factors contributing to the current state of dollar uncertainty.Besides proposed policy measures lacking specifics needed to assess their actual impact, tax reform and import taxes could very rapidly change the calculus for the US dollar.Although Trump and Mnuchin have been quick to dismiss dollar strength as unwarranted, if anything, they are trying to jawbone the currency lower, knowing full well it could go significantly higher.While possible trade barriers may help the US tackle the existing trade deficit, it could also cause the dollar to rise, further restricting the export economy while creating greater imbalances domestically. Already, the impact of the stronger dollar has been evident after the advance fourth quarter GDP figures showed US exports reversed significantly from the previous quarter’s sharp rise.

While partly attributable to the downturn in soybeans exports that comprised the biggest component of third quarter growth, the stronger US dollar has meant US exports are less competitive. Furthermore, the changes in monetary policy that also fueled part of the dollar’s rise have also vastly impacted the housing sector. Both existing and new US home sales missed expectations by a wide margin in the latest readings for December. Rising interest rates are causing mortgage costs to rise, forcing buyers to pause, and potentially creating downward pressure on prices. However, even if the housing market gains taper, other areas of the economy are roaring. Personal spending continues to rise, climbing 0.50% in December over November after increasing by 3.80% during the whole of 2016.