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USD can't avoid long-term depreciation pressures - Scotiabank

Analysts at Scotiabank explained that the dollar (USD) has spent much of the year on the defensive but the broader decline registered in the first three quarters of the year has moderated since the start of September. 

Key Quotes:

"We think there are grounds for expecting the USD to remain somewhat better supported in the next few weeks and possibly into the year-end but additional gains are not assured and we do not think the USD’s rebound means that it can avoid longer-term depreciation pressures.
 
In the short run, the USD has benefitted from the heightened conviction that the Fed will lift interest rates again in December and expectations that tax cuts will boost US growth (if only very modestly). 

A tax break on repatriating US corporate retained earnings, which may help fund tax give-aways, might add to upward momentum for the USD to some extent. However, the Fed and tax cuts are largely discounted by the market now while the FX effect of the repatriation question is difficult to quantify. Without additional, positive news the USD may struggle to extend significantly. 

Equally, if market expectations are disappointed, the USD will fall while the latest developments in the Russia investigation risk slowing the legislative process somewhat at least. In the longer run, we rather think the overall USD trend appreciation evident in the past few years is reversing. 

Broad and deep USD losses earlier in the year reflect improving global growth momentum and a shift to slightly less monetary accommodation elsewhere in the world which has undermined the USD’s growth and yield advantage somewhat. We think these trends will extend into 2018 and prompt a deeper drop in the USD."

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