USD: Boost from protectionism to unwind – CIBC

According to analysts at the Canadian Imperial Bank of Commerce (CIBC) the US dollar strength has been extended by protectionism, but they see that fading in 2019 as central banks abroad ease up on monetary policy stimulus.  

Key Quotes:  

“The US economy continues to reap the benefits of tax reform which has seen the market buttressing Fed rate hike expectations lately. Growth in Q2 is set to top 4%, the fastest pace since 2014, and with core PCE inflation near target, the Fed has every reason to stay on course to higher rates.”

“Trump is right to worry that the US dollar is reaching overvalued levels on trade fundamentals. But he’s wrong to put all the blame for dollar gains on the Fed. Tax cuts that draw in capital, and protectionism that scares investors in other countries, have also lifted the greenback.”

“If the EU is prepared to open the door to tariff-free access for US vehicles as it has done for Japan, we could see the first step towards a negotiated solution to the global trade war. It might take longer to resolve the sticking points with China and the two NAFTA partners, but by 2019, an easing trade war will help bring the US$ back to earth. Trump is likely using tariffs to bring others to heel in trade talks, not as a longerterm policy tool.”

“Markets will also be looking past the peak impacts of fiscal stimulus next year, and prospects for a slowing US economy in 2019, coupled with the early stages of monetary tightening overseas, will lean towards a softer US dollar.”