Jane Foley, Senior FX Strategist at Rabobank noted that the decades-old strong dollar policy of the US Treasury may have been swept under the carpet in recent years, but the Trump administration is making it increasingly clear that it is viewed as obsolete.
Key Quotes
"The US’ strong USD policy was originally iterated in 1995 by the then Treasury Secretary Rubin. It followed the sharp rise in US bond yields in 1994 and a drop in the value of the USD in that year and into early 1995. It was designed to reassure buyers of US treasuries about the risk of currency losses. In recent years, however, there has been little mention by the Treasury of its official line on the USD."
"This is not surprising since any economy suffering weak growth and low inflation would benefit from a weak rather than a strong currency. In the post-financial crisis period when the Fed was cutting interest rates and involved in buying assets, it would be contradictory and nonsensical for the Treasury to have dusted off its strong USD policy."
"As it stands the USD is the best performing G10 currency measured since the start of 2014. The fact that the Trump administration appears to be finally retiring the strong USD policy is not at all surprising – particularly in view of Trump’s stated aim of rebalancing the US trade deficit."
"Yesterday the head of Trump’s new National Trade Council Peter Navarro told the FT newspaper that Germany is using a “grossly undervalued” EUR to exploit the US and the EU partners. He also declared that Germany was one of the main hurdles to a US-EU trade deal. Currently, the EUR is indeed undervalued on a Purchasing Power Parity Basis vs. the USD. The OECD currently estimate fair value at EUR/USD1.33, though other academic measures suggest this value could be closer to 1.16."
"While Navarro yesterday referred to Germany, Trump was reportedly accusing Japan and China of pursuing “devaluation” in the past to gain a trade advantage over the US. Japan has not intervened in the FX market since 2011 following the tsunami/nuclear disaster and China has been ploughing through its FX reserves in order to prevent the CNY from weakening."
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