There's no way in which escalation with North Korea can be USD-favorable

Outlook:

We like a MarketWatch headline—"Fed's Yellen says low inflation a ‘mystery,' but not mysterious enough to keep rates low." We await Yellen's speech this morning for a little more clarification. She has a tailwind in the form of rising oil prices. The Fed never comments on transitory factors outside its influence or control, but the puzzling absence of inflation may be about to change on the rise in oil prices alone. As we all know, oil prices are like fog, sneaking into every corner of an economy and often having unexpected outcomes. One analyst told Bloomberg "the age of persistently low oil prices is nearing its end."

As for political duress in Europe, it's getting a lot of ink but we don't buy it as a sizeable or lasting currency factor. Merkel has to form a coalition, big deal. This is someone perfectly qualified to get the job done and with the least amount of fuss. Not to be rude to Italy, but Germany is not Italy. In Spain, the Catalonia problem has been around for decades. This time it's a referendum. Unless things get a lot worse and fast, we think political fragility in Europe is an excuse for traders to pare long euro positions and not a real reason.

In US politics, commentators wonder if Trump didn't initiate a ruckus over football players "disrespecting" the flag in order to distract attention from other matters, including the failure of the US government to do enough for hurricane-devastated Puerto Rico. Bush failed black New Orleans and now Trump is failing brown PR. The Republicans are making their whites-first/whites-only stance all too clear.

Old-timers can feel some distress at black athletes choosing the salute to the flag and the national an-them as the venue for civil protest, but at the same time, it's their best opportunity for publicity and Trump knows a thing or two about that. It's not for fat white old men to decide when and where a mi-nority protests. No less a hero than Jackie Robinson said he found it hard to salute the flag, given what he went through as the first black player in major league baseball history. Robinson broke the color line in 1947, 70 years ago.

Seventy years.

Or Trump may be keeping the flag thing going also to re-direct attention from his family and staff us-ing private emails for White House business, something Trump repeatedly said was a crime and worthy of locking Hillary up during the campaign. This is arrogance and hypocrisy of the highest order. The need for distraction is greatest when it comes to North Korea, which yesterday claimed that Trump's name-calling, insults and threats constitute a declaration of war, and accordingly, it will shoot down any US airplane it sees in self-defense even if outside its territorial borders.

The US has been buzzing N. Korea for years but with increasing frequency since the latest stink began. The public is not particularly alarmed but the experts are scared, really scared. One set gives the proba-bility of conventional warfare at 50-50, although a nuclear confrontation is still far down the scale at one in ten. Trump's generals say there are "4 or 5" other things we can try. Well, no. Unless N. Korea backs down on saying the US declared war, the "other things" are just noise.

Long run, we can't see any way in which escalation with N. Korea can be dollar-favorable. Trump himself, with no principles and no self-control, is a stand-alone dollar negative. Failure to propose actual policies and repeated ad-hoc statements are sapping the strength of political and business leadership, with business leaders on the whole doing a better job than government (on things like the Paris Ac-cord). But it's not their job, literally, and we shouldn't expect business big-shots to determine public sentiment. When it comes to war, the dollar usually gets a vote of confidence, even when it's a "bad" war like Bush Two's Iraq.
Not this time, probably. Your pension is at risk from Trump calling an opponent "rocket man." It's not really comparable but somehow this smells like the start of WW I--absurd.

The UK is also screwing things up. EC Pres Tusk meets PM May today in London, but back in Brus-sels, Brexit chief Davis contradicted May in the Friday speech, saying the UK will keep paying only if the EU agrees to the two-year extension and other matters. Bloomberg reports EU negotiator Barnier wants some other things "sorted" first, including the actual sums and what to do about the N. Ireland border.

The sums are not a trivial matter. "On Friday May offered to pay into the EU budget for two years, which amounts to about €20 billion (£18 billion, $24 billion), plus additional commitments that offi-cials in Brussels estimate run to another €20 billion. This still falls short of what the EU is after." The situation is a bit like the one in the US—the Bank of England has been making threatening noises about a rate hike, possibly in November, that the market has found credible. Sterling up. But political leadership lacks clarity and unity. After the initial shock of Brexit, the market has been giving the pound the benefit of the doubt. Last week the GBP/USD high was 1.3658, albeit on a spike. If we look at the chart on the 4-hour timeframe, it seems clear the pound is retreating. A 50% retracement would lead to 1.3218. The chart looks a bit like the euro chart. The euro/pound may end up moving more than either moves against the dollar. Right now the euro is weaker, but that's the rate hike story. As soon as we get more talk from Mr. Draghi (and presumably more muddle from May), we can imagine the euro resuming its trek toward parity.