Why does China promote a weaker Dollar?

Outlook

The US data this week is Tier One, starting with retail sales today. It may be the only happy news of the lot. The month-over-month is terribly choppy. The year-over-year is kind of grim. Then there’s ex-autos and ex-autos and gasoline, and something named “core” (which also excludes building materials and food). What is the point of retail sales that excludes food?

In November, sales rose 0.6% m/m and 3.3% y/y. The upcoming data for Dec is likely 0.4% or 3.1% y/y. Or maybe more, because of the holiday.

Also on the data front, tomorrow we get nonfarm payrolls, which will incorporate revisions. It must be a lousy number because econ advisor Hassett said we "shouldn't panic" if the numbers are weak.

The consensus forecast is for 70,000 jobs in Jan, better than 50k in Dec but still pointing to a softer labor market. The revisions for the year 2025 might be a shock—the preliminary revisions already took away 911,000 jobs for the year through March 2025. Still the unemployment rate is expected to stay at 4.4%.

We complained yesterday that the 10-year yield “should” be higher, whereupon it fell somewhat dramatically to under 4.2%. The standard reasons are upcoming Fed rate cuts, the economy slowing, inflation expectations on the rise, and safe-haven buying. The only thing here that qualifies is Fed rate cuts. As for growth, the Atlanta Fed GDPNow for Q4 was 4.2%. We get another estimate today. This hardly points to a slowdown.

The yield drop may also be due to Chinese regulators advising banks and others to pare back US Treasury holdings. This was mostly dismissed as more of the same when it came out and not a worry, but there may be something going on behind the scenes, like buyers being goaded/strong-armed into buying to counteract China.

Meanwhile, see the dollar/yuan chart in the Chart Package. It slipped under 7 yesterday and is farther down today. What does this mean? The yuan is a managed currency, not a free market one, so why does China promote a weaker dollar? The effect sought may be psychological rather than economic.

The Chinese lunar New Year begins next week (Feb 15-23) and markets will be mostly closed. This is the year of the Red Fire Horse.

Forecast

The news stream is chaotic. We have a new batch of Trump outrages, some intended to take attention away from Epstein disclosures. It’s becoming increasing unavoidable to accept that Trump did know what Epstein was doing. In the background, we have another upsurge in anti-dollar sentiment. This is mostly driven by the idea that there is a cyclical shift—the US slowing down and the rest of the world (ex-UK) starting to be more boomy.

One story has it the ECB would cut rates if the euro gets too high. ING calls the euro and others “pro-cyclical,” drawing money away from the US and the dollar.

Headwinds abound, including the Nov midterm election. It seems European banks know more about the midterms than most of the actual voters.

Other big European bank FX strategists are on board. US yields must rise to keep attracting capital to offset the trade balance. European equities are drawing capital from everywhere, including the US. The dollar is losing appeal because the Fed will be cutting and the differential will be narrowing.

And on it goes—dozens of reasons to shun the dollar and buy the new darling, the yen, plus the old stand-by, the euro. We smell not a little wishful thinking in all this commentary. Granted, the overvalued dollar has a long way to fall to normalize conditions, but as we keep seeing, the robust and resilient US economy gets growth rates that are the envy of G10. Currencies follow growth. Europe will be lucky to get 1.25-1.35%. The US may be getting over 4%.

So, gather ye rosebuds. The dollar collapse may not be as long-lasting as hoped. It’s going to be a long, long slog downhill punctuated by dollar rallies.

US politics

Trump said new Fed chief Warsh can drive the economy to 15% growth. This is unbelievably stupid. Likely the highest any country has managed in peacetime is China with 8%.

Trump also demands “respect” from Canada and some policy changes or he won’t let its new bridge to the US open. The bridge is badly needed and was started by Canada in 2018 and nearing completion.

Trump is also going to roll back the federal stance and federal funding for climate change initiative. Presumably he will say greenhouse gases are not bad for health and climate change is a hoax.