Is the U.S. president’s wish alone enough to weaken the U.S. dollar?

If the first, or the second of U.S. president’s comments could be interpreted as random statements, his continuous pressure on the dollar makes me feel that the U.S. administration is trying to weaken it deliberately. Investors remember the mid-1980s, when the agreement reached in Plaza Accord by the USA, Japan, the U.K. and Germany triggered strong dollar devaluation. At that time, the Fed was actively raising the interest rate, and global economy was suffering from protectionism. Doesn’t that remind you of something?

Donald Trump’s criticism of Jerome Powell’s policy shouldn’t be a surprise. In 2016, he claimed to be a supporter of low federal funds rate and criticized Janet Yellen for supporting the Democrats by means of ultra-easy monetary policy. The main reason for panic is the Fed’s unpredictable response. If Jerome Powell and his team do as the U.S. president suggests, the central bank is going to lose its credibility, the dollar will lose its status of a safe asset and selling out the U.S. securities will drive the USD index down.

By now, the Fed’s representatives haven’t shown any signs that the Fed’s policy will be changed. Atlanta Fed’s president Raphael Bostic still expects three more rate hikes in 2018, Dallas Fed’s president Robert Kaplan says there will be 3 or 4 more rate increases, followed by a pause after it becomes neutral. The derivative market is rather responsive to it; it is less certain that monetary restrictions cycle will go on in 2019.

Dynamics of probability of Fed’s rate hikes

Source: Bloomberg 

Is the U.S. president’s wish alone enough to weaken the U.S. dollar? The main fundamental drive for the USD index surge was the U.S. economy’s expansion, being faster than its competitors. According to Bloomberg forecasts, the U.S. GDP growth will speed up in 2018, unlike its peers in G7 member-countries, which will feature a decline.

Dynamics of GDP growth in G7 countries

Source: Bloomberg

The euro is put a pressure on by high policy risks and trade wars. Foreign holdings of the Italian securities were being cut the most fast in July (-€38 billion), breaking the previous record of €34 billion in June. If the process pauses and the U.S.-E.U. agreement is reached, the euro may recover.

The U.S. administration can start buying out the euro and the yen right now with the help of New-York Fed and the Exchange Stabilization Fund, but the resources are not that big ($22 billion); and they need the Congress approval to interfere with the Forex stronger. After all, Donald Trump and his team have a loophole – national security. If it’s used as a reason to introduce new tariffs, why shouldn’t they use it to manipulate exchange rates?

EURUSD is very close to the centre of the trading range that is between 1.15-1.185; however, it will hardly go higher unless Jerome Powell gives up. It won’t happen before the Jackson Hole summit, and so, I expect the situation should stabilize somehow.

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Price chart of EURUSD in real time mode

Dollar: Are the Kings Almighty?

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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