US: Heightened policy uncertainty contributing to volatile USD – MUFG

The US dollar has returned to a softer footing in the Asian trading session further highlighting the choppy nature of price action ahead of today’s inauguration for President elect Donald Trump notes Lee Hardman, Currency Analyst at MUFG.

Key Quotes

“The main developments yesterday for the US dollar were comments from both Fed Chair Yellen and Steven Mnuchin who is Donald Trump’s nominee for Treasury Secretary.”

“Fed Chair Yellen’s comments to the Stanford Institute for Economic Policy Research were interpreted less hawkishly given that she stated that “I consider it prudent to adjust the stance of monetary policy gradually over time”. At the same time she argued that the Fed had not fallen behind the curve by highlighting that wages had risen “only modestly: and the manufacturing sector was operating well below capacity. She also highlighted that another factor arguing for a gradual approach to raising rates were the developments in the Fed’s balance sheet.”

“In a footnote to her speech, she noted that the yield on the 10-year US Treasury bond could increase by about 15 basis points this year as the average maturity of their bond holdings shortens and as an eventual reduction in their balance sheet is approaching. It would be roughly equivalent on average to what has historically accompanied two 25 basis point rate hikes. The implication being that developments in their balance sheet could tighten monetary conditions thereby dampening the need for rate hikes. However, on a more hawkish note she argued against allowing the economy to “run markedly and persistently hot” which would be “risky and unwise”.”

“Comments from Steve Mnuchin during his confirmation hearing to become the next Treasury Secretary have captured some market attention as well. He reasserted US support for a strong US dollar policy which remained important over the long-term as it reflects America’s attractiveness as an investment destination. He also stated that he would not be commenting about short-term movements in the currency market as Treasury Secretary. When asked about President elect Trump’s recent observation that the US dollar was too strong, he interpreted them as having not been meant as a “long-term comment” but rather reflected some potential concerns about the effects of a strong US dollar.”

“Steve Mnuchin’s comments should help to ease concerns that the Trump administration will officially adopt a weak US dollar policy, although the market will remain wary that verbal intervention could still be used to dampen US dollar strength. We are sceptical that verbal intervention will prove effective at reversing US dollar strength.”