USD: The more unconventional, the weaker – Commerzbank

Unfortunately, there is currently only one major topic on the foreign exchange market: the US Dollar (USD). And the storm clouds seem to be gathering. Ahead of tomorrow's labor market report for June (the ADP figures are due today), let's summarize the arguments against the USD, some of which I think reinforce each other, Commerzbank's FX analyst Antje Praefcke notes.

Downwards is the path USD is set to take

"From the perspective of the fx market, there is first of all the frontal attack on the Fed and its chairman Jerome Powell. The way in which the central bank and its chairman are being attacked is unprecedented. However, there are plenty of examples of what can happen to inflation and currency when a central bank is no longer independent. In addition, the dollar's status as a safe haven has been tarnished. The termination of long-standing alliances, treaties, and agreements, as well as erratic decisions by the US government, are eroding confidence in stable economic, trade, and geopolitical policies of a previously reliable partner and, with it, confidence in its currency."

"It is doubtful whether the current trade policy will really reduce the US trade and current account deficits, especially as long as the US consumes more than it produces. And now we have the 'Big Beautiful Bill', which could potentially lead to a 'big beautiful budget deficit.' Which brings us to mutual reinforcement. Because if budgetary discipline in a country is poor, the central bank may have to counteract this with higher interest rates to prevent inflation from rising. Powell himself admitted that the Fed had waited to cut interest rates because of the tariffs in order to see what their effects would be first."

"However, if everything now points to possible future inflation risks, but the government is increasingly calling for interest rate cuts and some FOMC members are suggesting that this wish could be granted sooner rather than later, I think there is only one direction for the currency: down. Add to this the final ingredient of weakening fundamentals, which in turn will reinforce calls for interest rate cuts, and you have a toxic mix whose ingredients reinforce each other. The crux of the matter is that as long as 'conservative' monetary and economic policies are not pursued, but instead a government takes increasingly unconventional measures to fulfill quick election promises, the market will punish the currency."