Donald Trump’s policy negatively affects competitor-currencies of U.S. dollar

They wanted the best, and you know the rest. Donald Trump’s attempts to cut the U.S. foreign trade deficit by means of protectionism are doomed to failure. The more time passes, the more people understand it. According to New-York Fed, rising tariffs on Chinese imports will result in the reduction of not only US imports, but its exports as well. US companies, targeting foreign markets, strongly depend on the import of intermediate goods; and the increase in their costs reduces their competitiveness. Exporters’ pains are added by the U.S. dollar revaluation.

The topic of divergence in the Fed’s and competitor-central banks’ monetary policies is not so hot now as the extending growth-gap between the USA and other countries. It is about not only export-led Euro-area and China, but the emerging markets as well. They also suffer a lot form the U.S. protectionism and economic sanctions. The cases with Turkey and Russia alone are enough. The EM problems are worsened by growing demand for the U.S. dollar liquidity. According to the Institute of International Finance (IIF), in 2008-217 these countries’ debts increased by $40 trillion. At present, lenders are getting tougher with borrowers. Money must be repaid, which increases the demand for the greenback and sends MSCI indexes and the emerging markets’ currencies down.

Dynamics of the emerging markets’ debt

Source: FinancialTimes

Therefore, dollar enjoys living on someone else’s expense: the worse is performance of other currencies, the better are things for dollar. Alas, but that doesn’t help in achieving the ambitious goal of cutting the U.S. foreign trade deficit. And here can be the major threat for EURUSD bears. When the market doesn’t expect anything bad, it happens and the panic starts. JP Morgan and Deutsche Bank see a substantial risk that Donald Trump is going to be the first U.S. president, who will decide to weaken the U.S. dollar. Why not? If such an eccentric president’s plan ‘A’ doesn’t work, why shouldn’t he use plan ‘B’?

I, personally, think this scenario will be growing more likely if EURUSD is going down towards 1.1.-1.2. Will euro go there? It is hard to say. Meanwhile, I can definitely point to strong investors’ interest in the economic growth-gap and in the topic of extension of the Turkish problems to Italy, which is all proved by the assets’ trends, moving in sync.

Dynamics of USD/TRY and Italian yields

Source: Bloomberg

If Istanbul stabilizes the situation, and the growth-gap between the US and Euro-area economies turns out to be not that wide, as it has been thought before, then EURUSD bulls will consolidate in the range of 1.14-1.15. And the first signal has already been sent: German GDP was growing faster (+0.5 Q-o-Q) in the second quarter than Bloomberg experts had expected. A good start?

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Price chart of EURUSD in real time mode

Dollar’s Meat is Euro’s Poison

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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