USD sell-off accelerates after Trump welcomes weakness

USD: Trump reinforces US dollar sell-off ahead of FOMC meeting

The US dollar sell-off intensified yesterday resulting in the dollar index breaking below last year’s low at 96.218 from 17^th September, and falling to a fresh low of 95.551. Broad US dollar weakness has helped to lift EUR/USD back above the 1.2000-level for the first time since June 2021. The price action supports our forecasts for the US dollar to weaken further this year (click here). US dollar weakness accelerated yesterday after President Trump told reporters “I think it’s great” when asked if he was worried about the sell-off. He added “I think the value of the dollar – look at the business we’re doing. The dollar’s doing great”. The comments reinforce the impression amongst market participants that the Trump administration wants a weaker US dollar to support the manufacturing sector by improving external competitiveness. It quickly follows reports on Friday that the Federal Reserve Bank of New York carried out rate checks which have encouraged speculation that the US could intervene alongside Japan. Joint intervention would send a stronger signal that Trump wants a weaker US dollar as well. President Trump highlighted that he “used to fight like hell” with China and Japan because “they always wanted to their currencies. And I said, not fair that you devalue, because it’s hard to compete when they devalue. But they always fought, no our dollar’s great”. However, he cast devaluing your currency as an unfavourable outcome which they are unlikely to actively pursue.

Even if the US does not intervene to weaken the US dollar against the yen alongside Japan, heightened US policy uncertainty under the Trump administration is already having a clear negative impact on the US dollar. Recent foreign policy actions including removing the president in Venezuela, threating to impose tariffs on fellow NATO members over Greenland or even invade, and threatening further military strikes in Iran have unsettled investors. It comes  alongside another attack on the Fed’s monetary policy independence when the Department of Justice opened a criminal investigation into Fed Cahir Powell. The latest developments have prompted market participants to price in a higher domestic policy risk premium into the US dollar. The price action is similar to last year after President Trump’s “Liberation day” tariffs announcement in April. US dollar performance has started to diverge from normal short-term drivers such as yield spreads. It has meant that the US dollar has failed to benefit from the scaling back of Fed rate cut expectations at the start of this year. US rate market participants expect the Fed to leave rates on hold at tonight’s FOMC meeting and for the remainder of Chair Powell’s term that ends in May. We expect the Fed to indicate tonight that they are not in a rush to cut rates as soon as the following FOMC meeting in March but are likely to stick to plans for further easing this year. Yesterday’s sharp drop in the Conference Board’s measure of consumer confidence to the lowest level since 2014 highlighted that labour market weakness remains a concern even as consumer spending has remained strong.                               

DOLLAR INDEX MOVING FURTHER BELOW AVERAGE OVER LAST DECADE

Source: Bloomberg, Macrobond & MUFG GMR

G10 FX: Commodity FX & CHF benefit from currency debasement fears

The two best performing G10 currencies this year have been the Norwegian krone and Australian dollar both of which have already recorded outsized gains of over 5% against the US dollar. The krone has benefitted from the pick-up in the price of oil at the start of this year driven by President Trump’s foreign policy actions relating to Venezuela and Iran. While the outperformance of the Australian dollar (click here) has been encouraged by building optimism over stronger global growth and rising commodity prices alongside market expectations for the RBA to hike rates at the start of this year. RBA rate hike expectations have been reinforced overnight by the release of the latest inflation data from Australia. The latest CPI report revealed that headline inflation unexpectedly picked up to 3.8% in December moving further away for the RBA’s target. The trimmed mean measure of core inflation increased strongly by 0.9%Q/Q in Q4 lifting the annual rate to 3.4%. Alongside recent evidence of tighter labour market conditions, the CPI report will add to the RBA’s concerns over persistent inflation risks. The Australian rate market has now moved to more fully price in a hike at the next meeting in February.

The best performing major currency has been the Swiss franc which is currently threatening to break higher against the euro as well. In recent years, EUR/CHF has traded within a  narrow range between 0.9200 and 0.9500. If the Swiss franc continues to strengthen it will increase pressure o the SNB to take action given the significant inflation undershoot in Switzerland. The main policy options remain intervention to weaken the franc and/or lowering rates into negative territory to dampen currency strength. The loss of confidence in the US policymaking has triggered renewed fears over currency debasement. Precious metal prices including gold and silver have surged higher above USD5000/ounze and USD100/ounze respectively. Over the long-term the Swiss franc has been the best store of value amongst major currencies boosting its appeal during heightened debasement fear periods. It is creating a dilemma for the SNB who have clearly indicated that they would prefer not to return to negative rates in Switzerland.  

KEY RELEASES AND EVENTS

Source: Bloomberg & Investing.com