SINCE late December 2016 the US dollar has been falling in value, but why?

Initially the fall was easy to explain. Donald Trump was elected president a month before the greenback’s peak and the market had got ridiculously carried away with hopes of tax cuts, inflation and interest rate hikes.

The new year had a period of the Trump administration achieving more or less nothing and the dollar lost its sheen.

Since then, the dollar has continued to fall. But when you look at what has happened over this period, the bull case from the post-Trump euphoria has pretty much played out.

After a slow start to 2017 we saw US growth pick up in the second half of the year and it looks like it will have annualised around three per cent.

Meanwhile, despite an absence of any tax cuts for most of 2017, the Federal Reserve still managed to raise interest rates three times in a year for the first time in more than a decade.

Then, finally, there was a very substantial package of tax reforms at the end of 2017. In fact, this was probably the most significant package of tax reform in 30 years.

Most people would intuitively assume that this would lead to a stronger dollar, so why has it fallen? The main reason has very little to do with the US and everything to do with everywhere else.

For much of the period since the financial crisis the US has been the only game in town for investors. Emerging markets, Asia, Europe and the UK all struggled. Emerging markets began to turn the tide in 2016, although China suffered a sharp slowdown, and in the UK Brexit caused a sharp devaluation in the pound.

Then in 2017 there was a synchronous recovery in Europe, China reaped the benefits of its biggest combined monetary and fiscal stimulus on record, and the UK proved that while it might be down it is far from out.

Suddenly, the dollar was no longer the only game in town and investors had other options, but where does that leave the dollar now?

When investing we like to look for alignment of all the planets before we take a very pronounced position. Those planets are not currently aligned.

As contrarians we really like the fact that investors loathe the dollar. As value investors the fact that it offers the highest interest rates of the major currencies is also attractive.

Despite that, the dollar is not especially cheap by our favoured metric, which takes into account its relative inflation rates compared with those of its trading partners.

Furthermore, when a big, liquid currency establishes a trend it becomes somewhat self-reinforcing because it draws in certain hedge fund strategies which, among other names, are known as trend-followers.

That can continue to push currency pairs a long way.

Where does that leave sterling?

We have been positive on the pound for most of the past year. At various times the political news flow has been pretty uninspiring, but as usual this has commanded less of investors’ attention than forecasters seemed to appreciate.

What matters is that the economy performed reasonably well. The UK has been a laggard against Europe and the US, but no basket case. With the pound undervalued there was scope for recovery – we remain of that view.

There is still some undervaluation and while enthusiasm for sterling has grown it has not reached the disconcerting levels of consensus currently behind the euro. For the rest of 2018, therefore, we expect UK smaller companies to continue to perform very well.

Hopefully those European holidays should be better value this year too.

Stephen Martin is head of Glasgow at Brewin Dolphin.