The dollar has been at elevated levels for the past five years. It has been aided by strong US economic growth over this time. Indeed, the current economic expansion has now become the longest on record.
As a result, the US jobless rate has fallen to a 50-year low of 3.5%. Widening interest rate differentials and bond spreads have also helped the US currency, with the Federal Reserve steadily tightening policy in 2017-18.
This saw the fed funds rate being raised by 200 basis points to a 2.25%-2.5% range by the end of last year, well above the level of interest rates in other major economies.
Foreign exchange positioning, though, has become quite long regarding the dollar, limiting the potential for further gains by the greenback, especially given that it is already at quite high levels against many currencies.
Thus, the dollar has been confined to a very narrow range on a trade-weighted basis over the second half of this year. Some other factors have also turned less favourable for the dollar.
The US economy has moved onto a slower growth path, with GDP growing at a moderate 2% rate in the last two quarters. The Fed has responded by lowering rates by 75 basis points since mid-year.
Improved risk appetite in markets in the second half of the year, helped by signs of progress in US-China trade talks, is also lessening the appeal of safe-haven currencies like the dollar.
Nonetheless, the relative strength of the US economy, as epitomised by the very strong employment report for November, and still wide interest rate differentials remain supportive of the US currency.
The persistence, elsewhere, of very low and, indeed, in some cases, negative interest rates is also making it difficult for other currencies to make ground against the dollar. In particular, the marked slowdown of the eurozone economy and significant policy easing by the ECB this autumn mean that the euro remains weighed down at relatively low levels against the dollar.
The euro largely traded in a tight $1.12-$1.14 band in the first half of this year. It has edged lower to trade in a narrow $1.09-$1.12 range since mid-July, as the ECB moved back onto a policy easing path.
Strong technical support for the euro at around the $1.08-$1.09 level held over the autumn. The euro-dollar rate has largely traded in a tight $1.10-$1.11 range over the past month, with both the Fed and ECB putting policy back on hold after their earlier easing moves.
The dollar is only likely to weaken significantly if it becomes apparent that the US economy is heading towards recession and the Fed has to cut rates a lot further. It is worth noting that the euro/dollar rate has spent very little time above the $1.20 level ever since the ECB moved to negative rates in 2014.
It is expected that money market rates will remain negative in the eurozone until the middle of the coming decade. Thus, it would probably require large rate cuts in the US to drive the euro above the €1.20 level, especially as the ECB would also be likely to resume easing policy in such circumstances.
Absent a US recession, then, it is hard to make a case for the euro to recover against the dollar. Thus, the single currency could continue to trade in a narrow $1.09-1.13 range for much of 2020. It is likely to be the same story for most other currencies as they remain marooned at low levels against the strong US dollar.