Trump strikes the dollar down

In an interview with CNBC, President Trump cited that he's “not thrilled” with the Fed raising interest rates and noted that the Chinese yuan is “dropping like a rock”. The administration's desire for a weaker US dollar shouldn't come as much of a surprise to markets - we've heard this before. But Trump's comments will most likely mark a top in the USD rally

Opinions
19 July 2018
270518-image-dollar_whitehouse.jpg

Initial thoughts on Trump's dollar jawboning... anyone surprised?

We suspect the President's comments on US interest rates and currency markets will almost likely put an end to the USD rally – and in the absence of any immediate escalation the global trade war, it’s a mini lifeline for EM and risky currencies elsewhere. We’d always been wary of the administration’s desire for a weaker USD – and that in itself USD weakness could become self-fulfilling if that is the White House’s objective.

Indeed, this draws parallels to what we saw in January 2018 – when Treasury Secretary Mnuchin let slip about a “weak US dollar”. Moreover, Donald Trump's views shouldn’t be new news to USD markets – we heard the President talk down the US dollar and cite a desire for low interest rates back in April 2017. The White House may be running damage control by quickly coming out with a statement that the President "respects the independence" of the Fed.

Political economy of a weak dollar is a medium-term negative

While back in January the DXY index fell around 5% in a short window (with Secretary Mnuchin’s comments partly adding fuel to the weak USD fire) – we’re shouldn't get too carried away. The political economy of the dollar is a medium-term negative; however, the fundamental outlook for major currencies - such as the EUR, JPY and CNY - is considerably weaker relative to January 2018 (when markets were dominated by the theme of synchronised global growth, which the current trade wars have put a dent to). As such, the President's comments are more likely to, on the margin, stem flows into USD assets given renewed (explicit) uncertainty over the US administration’s dollar policy – however, we're unlikely to see the same degree of weakness that we saw back in January.

Bottom line: A top in the USD rally but no material decline for now

With the short-term fundamental USD dynamics having already started to turn before President Trump's comments (Fed Chair Powell merely gave the USD one final push) – we think this now almost likely marks a top in the USD rally in the absence of any further near-term escalation in the global trade war narrative. It'll certainly sow renewed seeds of doubt into global investors when assessing the outlook for USD assets. It's likely that major FX pairs return back to trading within current (narrow) ranges.

We look for EUR/USD to stay within the 1.15-1.18 range for the rest of summer - while the odds of USD/JPY moving above 114-115 have been greatly reduced.

Political economy of the US dollar a medium-term negative

For more on why the Trump administration's implicit weak dollar policy will be self-fulfilling over the medium-term, please our previous notes:

Viraj Patel

Viraj Patel

Foreign Exchange Strategist

Viraj is an FX strategist at ING. He has been with the firm since January 2015 and covers developed markets. Prior to this, he worked at Barclays and the Bank of England. Viraj read Economics at the University of Cambridge and is currently working towards his CFA charter.

Viraj Patel is no longer part of the ING THINK team


Disclaimer

"THINK Outside" is a collection of specially commissioned content from third-party sources, such as economic think-tanks and academic institutions, that ING deems reliable and from non-research departments within ING. ING Bank N.V. ("ING") uses these sources to expand the range of opinions you can find on the THINK website. Some of these sources are not the property of or managed by ING, and therefore ING cannot always guarantee the correctness, completeness, actuality and quality of such sources, nor the availability at any given time of the data and information provided, and ING cannot accept any liability in this respect, insofar as this is permissible pursuant to the applicable laws and regulations.

This publication does not necessarily reflect the ING house view. This publication has been prepared solely for information purposes without regard to any particular user's investment objectives, financial situation, or means. The information in the publication is not an investment recommendation and it is not investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Reasonable care has been taken to ensure that this publication is not untrue or misleading when published, but ING does not represent that it is accurate or complete. ING does not accept any liability for any direct, indirect or consequential loss arising from any use of this publication. Unless otherwise stated, any views, forecasts, or estimates are solely those of the author(s), as of the date of the publication and are subject to change without notice.

The distribution of this publication may be restricted by law or regulation in different jurisdictions and persons into whose possession this publication comes should inform themselves about, and observe, such restrictions.

Copyright and database rights protection exists in this report and it may not be reproduced, distributed or published by any person for any purpose without the prior express consent of ING. All rights are reserved.

ING Bank N.V. is authorised by the Dutch Central Bank and supervised by the European Central Bank (ECB), the Dutch Central Bank (DNB) and the Dutch Authority for the Financial Markets (AFM). ING Bank N.V. is incorporated in the Netherlands (Trade Register no. 33031431 Amsterdam).