Yahoo Finance U.S. Dollar: Trade War Rhetoric, Strong Economy Aiding the Currency
Way back in January Treasury Secretary Steven Mnuchin bluntly stated his desire for a weaker U.S. Dollar. President Trump quickly corrected him and the dollar weakened. However, conditions began to change about mid-February when talk about at least four Fed rate hikes began to surface and the dollar reached its bottom for the year.
Since the week-ending February 16, the September U.S. Dollar Index has risen from 87.455 to 95.440 the week-ending July 20. Currently, the dollar index is in a position to overtake this high and send it to highs not seen since mid-2017.
While the Fed’s two rate hikes this year and expectations of at least two more rate hikes may have provided the legwork for most of the rally, the greenback has also received support from those realizing that it’s just the strongest currency on the board right now and likely to remain so because the U.S. economy is on pace for continued strength.
Besides expectations for additional rate hikes, the dollar has received support recently from safe-haven buying due to concerns over an escalating trade war. To put it another way, investors may be betting that the U.S. will emerge from the current worldwide trade tensions as the major winner.
In late July, the United States and the European Union made positive moves to avoid a trade war by agreeing to work toward lower tariffs and other trade barriers and to buy billions of dollars of American soybeans and natural gas.
President of the European Commission, Jean-Claude Juncker even said that day, “I had the intention to make a deal today, and we have made a deal today.”
Additionally, the U.S. may be reworking NAFTA which may result in separate deals with Canada and Mexico.
In the meantime, China continues to try to do economic battle with the United States by imposing additional tariffs against the world’s largest economy on August 8. Just a day earlier, the U.S. promised additional tariffs to begin on August 23. China will continue to retaliate, but eventually, it will run out of bullets because the world’s second-largest economy just doesn’t import enough U.S. goods to counter all of the tariffs the U.S. could impose on all the goods the U.S. imports from China.
Japan is an interesting study. One could build a case that the Bank of Japan floated the idea of ending its ultra-low interest rate policy in July because it is worried that the weaker Japanese Yen would anger the U.S.
Until today’s trading session, the Japanese Yen strengthened for six consecutive sessions just ahead of the start of key trade talks in Washington. At today’s trade talks, Japan will be seeking to avert tariffs on its car exports and fend off U.S. demands for a bilateral free-trade agreement.
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Even a Fed policymaker voiced his support for the tariffs recently. St. Louis Federal Reserve Bank President James Bullard told CNBC that countries espousing free trade in response to U.S. trade war threats should just drop all their own tariffs to zero.
The dollar is also being supported because the U.K. can’t agree on a Brexit strategy. The New Zealand Reserve Bank said earlier today that it won’t raise rates until 2020. The European Central Bank is only preparing its plan to end stimulus and Saudi Arabia is signal handily weakening the Canadian Dollar by ordering money managers to dump the Loonie.
Everything going on right now in the markets seems to be pointing toward a strong U.S. Dollar. Let’s just see what happens when it hits a new high for the year shortly. If current conditions continue then we could see a steep rally.
This article was originally posted on FX Empire
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