USD: Prohibitive?

Jane Foley, senior FX strategist at Rabobank, points out that the US President Trump has stated over the weekend, that he does not want “a dollar that’s so strong that it makes it prohibitive for us to do business with other nations”.

Key Quotes

“Once again Trump appeared to be expressing his preference for a softer exchange rate. This would be consistent with comments he made in January 2017 that the dollar was “too strong”. He reiterated this position in April 2017 and in July of that year when he said he favoured a unit that was “not too strong”. Trump’s preferences for the USD have not all been one way. After a sell-off in the value of the greenback in January 2018, he reiterated the strong USD policy. Either way, the President appears to have little qualms about verbal intervention in the FX market.”

“The recent gains of the USD can be easily explained in terms of last year’s fiscal expansion initiated by Trump himself and the response of the Federal Reserve in tightening policy to prevent the economy overheating.”

“Relatively to early November, the Fed’s position in recent months has become far more dovish. While this will likely have pleased the President, there has been sufficient weakness in US activity and price data to justify the Fed’s policy and indicate that policy has not been politically motivated.”

“Looking ahead to March, the market will be looking for signals as to how policy will be positioned through the rest of the year. Crucially, even if the Fed is judged to be dovish this may not have a lasting impact on the value of the greenback. Insofar as the value of a currency is gauged against that of another, the USD is at risk of remaining firm if other central banks take an even more dovish tack. Given downside risks to growth in Europe and in Asia, we expect the USD to retain a relatively firm tone this year. The implication is that further outbursts from Trump on the USD remain probable.”

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