Dollar stabilises after Trump’s intervention

The dollar is regaining some poise after president Donald Trump sent the currency sliding yesterday with his surprising assertion that the buck is “too strong”.

As Commerzbank puts it: “Oops, he did it again.”

At publication time, the dollar index, which tracks the greenback’s value against a range of other major currencies, was still well below the point of Mr Trump’s comments, but up by 0.2 per cent from its overnight low. Sterling was a shade under its highest point of the day at $1.2555, while the euro was also edging lower at $1.0655.

Ulrich Leuchtmann at Commerzbank said that unless Mr Trump “quickly performs a similar U-turn in the question of the exchange rate policy as he did in his approach to Syria (which admittedly is possible at any time)” then the pledge in the G7′s London accord to not target exchange rates might also go out the window.

“Nobody cares at the moment. All central banks are currently wallowing in the hope of reflation and see little cause to weaken their currencies artificially,” Mr Leuchtmann said.

“However, if reflation does not happen (and that in turn is what falling inflation expectations suggest once again) there is the risk of a currency war. Thank you, President Trump!”

While Mr Trump’s sting was unexpected, and also somewhat at odds with his previous broadsides against other countries’ efforts to cool their currencies, some observers think it has merit.

Says Lee Hardman at Bank of Tokyo-Mitsubishi UFJ:

It is not the first time that he has expressed the same line of thinking on the US dollar since winning the US election. It fits with our view that the US dollar is already significantly overvalued according to our long-term valuation models which is helping to dampen the scope for further upside.

But…

Verbal intervention on its own is unlikely to prompt a sustainable reversal of US dollar strength unless backed up fundamental drivers as well. The increased likelihood of more modest US fiscal stimulus, the Fed’s strong commitment to only gradual tightening, and the gradual ongoing shift towards monetary tightening overseas could all help to ease President Trump’s concerns over the strength of the US dollar in the year ahead.

The big movers in Asia today were the South Korean won and Australian dollar. In the case of the former, the Bank of Korea kept interest rates on hold, as expected, but subsequently upgraded its forecast for domestic economic growth in 2017 and said low interest rates were less necessary than before.

The Aussie dollar jumped as data showed the Australian economy added about three times as many jobs as economists had forecast during March, which was in stark contrast to the Reserve Bank of Australia’s warning earlier this month that the national labour market had “softened recently”.

(Chart: Bloomberg)