Trade Rhetoric fails to Dent Dollar

President Trump and his Senior Trade Advisor Peter Navarro launched an attack yesterday on those countries who “live on devaluation”. Trump said. "You look at what China's doing, you look at what Japan has done over the years. They play the money market, they play the devaluation market and we sit there like a bunch of dummies."

I am not sure there is a devaluation market but I think we get the point.

Navarro was equally forthright castigated Germany for using a "grossly undervalued" euro to gain advantage over the United States and its own European Union partners.

There is an unwritten agreement that the President doesn’t talk about the dollar leaving that to the Fed and Treasury. Trump has witnessed first-hand the reason why that decision was taken.

However, given his propensity towards a sound-bite it would appear he got his wish. Markets will do well to be aware of this new feature of what has been a bizarre couple of weeks. A badly timed bon-mot could set off any kind of reaction!

There is a more than a hint of truth in Navarro’s comments, Germany whilst benefitting, as do her neighboursfrom a weaker Euro (fallen from 1.40’s to mid-1.00’s) any increase could cripple any growth across the region, particularly in Italy.

The Italians are suffering from a banking crisis with the oldest bank in the world, Monte dei Paschi di Sienna on the brink of collapse being bailed out both by the Italian Government and EU. Too big to fail? Italy certainly, Monte dei Paschi……..not so sure.

Japan and China also came in for a bit of trade bashing. China is close to being labelled a currency manipulator which automatically adds tariffs to their exports to America.

Japan has long had a (not very) secret “Weak Yen Policy” which is entirely sensible given their export driven economy.

What is less sensible however is the macho strong dollar policy in the U.S. stretching back to Clinton (Bill)’s administration there is a mistaken belief that a strong country and a strong dollar go hand in hand. Globalization has driven countries to desire a weaker currency wherever possible although there was some reason for a strong dollar in the past given America’s energy imports and domestic consumption.

It seems the strong dollar policy, overt or covert, is now about to be ditched as Trump starts ruffling a few more feathers.

There is a possibility of a response imminently from Germany who, with Merkel about to agree a visit to Washington, will do well not to adopt the Trump playbook and give a considered response.

Consumer Credit data released in the U.K. yesterday showed the first sign of contraction sine the Brexit vote. This adds significance to tomorrow’s release of the Bank of England Quarterly Inflation report as any choking off of the consumer may have serious consequences for GDP going forward