- The US Dollar is gaining ground across the board, ignoring
- Poor data does not seem to have an impact beyond a few minutes.
- There are three reasons for the rise, that may not be done just yet.
US President Donald Trump criticized Fed Chair Jerome Powell for raising rates, Quantitative Tightening and wanting a strong dollar. His wish for a more modest greenback came true, but only for a short period of time. The weekend gap closed quite quickly.
The buck also bucks weak data: the lowest ISM Manufacturing PMI in nearly three years, published on Friday, resulted in a minor blip, but that was about it. The USD totally ignored the depressing Construction Spending figure which will subtract from GDP.
Why is the US Dollar so strong?
1) The cleanest shirt in the dirty pile
The US economy may be slowing down, but it still grew at a satisfactory pace of 2.6% annualized in Q4, better than expected. China, albeit expanding at different levels, saw the lowest growth in 28 years in 2018.
The euro-zone is slowing down to only 0.2% QoQ in the past two quarters and the ECB may be forced to end the tightening cycle before it even began. The story in the UK is similar: Brexit may be delayed but the damage is already done. And the same applies to Canada: the economy is slowing even as oil prices are rising and the uncertainty about trade with the US has been removed.
And even if the US economy sneezes, the rest of the world will catch a cold. There are plenty of other cliches, but despite the rise of emerging markets and globalization, the US is still the leader and it can drag the rest of the world lower.
2) Limited trade deal already priced in
A trade deal between the US and China has not been done, but it’s very close. The good news usually weighs on the greenback, a safe haven currency.
But why isn’t the dollar falling on optimism about a trade deal?
One explanation is that such an accord is already priced in. But that does not tell the whole story. Details emerging from the talks seem to show that Trump is settling for a modest deal. He does not seem to reach down to the roots of China’s behavior that American politicians of all stripes are united against.
An agreement that does not include a revolution in intellectual property and consists of only weak enforcement, may not be good enough. In addition, it is unclear if tariffs will be removed immediately or only gradually. These levies weighed on the global economy.
3) The Fed may still raise rates
Fed Chair Jerome Powell reiterated his message of “patience” regarding raising rates and also talked about ending the balance sheet reduction program, or Quantitative Tightening, as soon as the end of the year.
Yet he also said that “the US economy is in a good place”, circling us back to the first point: the US is doing better than the rest. The strongest point of the economy is the labor market, and this Friday’s Non-Farm Payrolls report may serve as a reminder of America’s economic might.
Moreover, he never fully committed to the end of this cycle. The world’s most powerful central bank may still announce a rate increase later this year.
On this background of significant trends in economies, central banks, and markets, the US Dollar is King, and Donald Trump is only the President.
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