The U.S. administration discusses the advantages of strong currency
Times are changing. If previously Donald Trump and his team were talking about the profits of weak dollar and charged other countries with competitive devaluation of their local currencies, then, now they start sounding rather hawkish. According to the U.S. president Trump, “Money is pouring into our cherished DOLLAR like rarely before, companies earnings are higher than ever, inflation is low & business optimism is higher than it has ever been.” His chief economic adviser, Larry Kudlow, described the dollar as “strong and steady,” which is a sign of confidence that allows containing commodity prices, including oil. At the same time, everybody understands that revaluation hinders improving the U.S. foreign trade affairs. Anyway, the U.S. doesn’t seem to worry much, sticking to the motto “Let the world exist for us alone!”
Investors go on dwelling upon the visit to the USA by China’s delegation, which has comforted emerging markets in a way and let EURUSD go up from its 13-months lows. Donald trump is fueling the situation. According to president Trump, China’s officials “very much want to talk”, “They just are not able to give us an agreement that is acceptable”. Therefore, the U.S. president doesn’t seem to count on a deal and isn’t willing to do it until the USA gets a deal, fair to the country. Well, everybody understands the word “fair” in a different way. Chinese officials also think a chance of compromise is very little, and the negotiations are needed only to avoid complete ending of trade relations. Capita Economics reminds that the countries had reached a truce in May, but it lasted for only two weeks.
I don’t think that the upcoming talks will radically change the situation. As long as there is tension around China, Turkey and other emerging markets, I don’t think there will be massive dollar sales. Yes, EURUSD bears stepped back but haven’t abandoned the hope to press euro quotes down towards 1.12. Deutsche Bank and Nomura even suggest that euro will drop down to $1.1
Larry Kudlow notes that trillions of dollars are coming to the USA amid its economic boom and he is obviously right. The growth-gap between the USA and other economies is rather wide, that is why EURUSD is sliding down, and USDCNH is flying up. The U.S. retail sales are 6.4% up on an annual basis, which is over two times more than inflation growth rate. Strong increase in the U.S. employment, low unemployment rate and the fiscal stimulus allow US housewives to go on spending money. As a result, Atlanta Fed expects the US GDP to grow in the third quarter even faster than in the second one; and the Fed can safely continue hiking up the rate.
Dynamics of the U.S. GDP growth
Source: Wall Street Journal.
The future outlook will be discussed by the central banks’ presidents, including Jerome Powell, in Jackson Hole, Wyoming, during the week, ending August 26. The topic of divergence in monetary policies will be hot again; it has been working to dollar advantage during the past few years. Therefore, it makes some sense to sell EURUSD on its price rise towards 1.1435-1.1445 and 1.15-1.151.
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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.