- Rabobank Marginally bullish the Dollar

- More due to weakness elsewhere than intrinsic worth

- View held despite expecting no more rate hikes at the Fed

The U.S. Dollar is the ‘least ugly’ currency in the G10 and is likely to remain ahead of the rest of the pack in 2019, but more due to the weakness of the others than its own ‘intrinsic’ worth, says Jane Foley, head of FX strategy at Rabobank.

The call by the strategist comes as the U.S. Dollar mounts a fresh onslaught with the currency laying down a strong marker at the start of February.

Above: The Dollar is the best performing major currency in the past week.

While the Dollar is up in February it still has some work to do before it can lay claim to the crown of 2019's best performer owing to a soft start to the new year.

“Last year we were Dollar bulls and this year, perhaps, less so, but we certainly don’t see the Dollar giving away an awful lot of ground,” says Foley. “If you look at the foreign exchange world it is impossible to look at a currency in isolation. If you are going to sell the Dollars you need to be buying something else. So what do you buy?”

The problem is there is no clear answer to the question of what to buy, according to Foley, because all the rest of the G10 currencies have something ‘wrong’ with them.

“You look at the Euro and again we had another piece of weak data from Germany today, and the market really scratching its head as to how the ECB can maintain such a hawkish stance. If you look at Australia - again the market debating whether or not they will cut interest rates this year. Sterling is of course dominated by the whole Brexit view. In order to sell Dollars, what are you going to buy?” asks Foley.

“What we have had with the Dollar is a souring of the outlook really from around November, December and through January too, and perhaps recently the market has turned sour on these other currencies too,” adds the strategist in an interview with Bloomberg News.

Foley meanwhile expects the Federal Reserve to end it's interest rate hiking cycle.

Rising interest rates normally pushes up the value of the host currency because they help attract and keep foreign capital inflows. Thus an end to the Fed hiking rates in the U.S. would normally be seen as a capping Dollar gains.

“Our view is this is it and we have probably seen the end of the hiking cycle,” says Foley. “Certainly for us we do see the risk of a technical recession in the U.S. next year and perhaps by the middle of the year that yield curve inverted.”

Labour data for January was exceptionally good after showing a 304k rise in payrolls for that month and this has been used as an argument that the economy will keep growing and the Fed will actually have to continue to raise interest rates to cool inflation down, but despite the payrolls ‘smash’ actual wage inflation remained subdued - not just in America but the whole G10.

“If there was a disappointment in Friday’s non-farm payrolls it was on the wage inflation number,” says Foley who countered claims wage growth is rising robustly by saying that is only true for this cycle - not when compared to previous cycles which saw much steeper growth - and that the shallow wage growth in this cycle is part of the problem with perennially low growth and inflation.

Yet equally, there is not much sign of wage inflation anywhere else in the G10, especially not Australia, so Foley sees little upside momentum likely from counterpart currencies.

In the case of the Australian Dollar she sees additional headwinds from the domestic housing market, and from tensions to do with the China-U.S. trade wars, to which it is most exposed.

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