FX Talking: Trump’s currency, your problem

While the incoming US administration may not welcome this dollar appreciation, it may not be until corporate America starts to scream that Washington takes notice. Before then the focus on Washington’s early use of tariffs and immigration controls – plus expectations of looser fiscal and regulatory policy – will all keep the dollar supported.

The combination of a stronger dollar and higher Treasury yields is crowding out financial flows to the rest of the world and is starting to cause problems. Brazil has already had to hike rates and use $30bn of its FX reserves as it fights to protect its local currency. And probably the most important FX market battleground right now is USD/CNY – where the People’s Bank of China is still managing to hold the line even as depreciation pressure intensifies.

Using the tariff era of 2018-2019 as a template, we expect the dollar to stay strong all year. And given our call that the European Central Bank will be prepared to take the policy rate sub-neutral – perhaps as early as the second quarter – EUR/USD should be grinding towards parity.

It is going to be a difficult year for all activity and EM currencies – and certainly for any country running a trade surplus with the US. After the dollar, we think it may well be the defensive Japanese yen and Swiss franc which outperform.