Analysts at Wells Fargo, believe a tariff escalation from here could have an even further influence on the Federal Reserve’s monetary policy decisions.
“Over the course of this year, the U.S. dollar has been relatively resilient to political pressures and escalating trade tensions. Since the start of the year, the U.S. dollar index (DXY) has moved about2 % higher. We believe the dollar’s resilience has largely been a product of the U.S. economy outperforming other major economies, and despite rate cuts, the U.S. dollar still offers investors a relatively attractive yield. In addition, the U.S. dollar continues to be perceived as a safe haven currency, and, with a slew of global developments creating financial market volatility, there continues to be demand for the safe haven characteristics of the greenback.”
“However, going forward, if political pressure from the current administration gets more intense and the perceived independence of the Fed were to come into question, we could see the U.S. dollar be less resilient to these pressure and begin to exhibit some weakness.“
“Escalated and prolonged trade tensions between the United States and China could create an environment where markets price in even more aggressive Fed easing. Given our view that the Fed has been a bit more reactive to financial market developments in recent times, the Fed could choose to pursue a more prolonged monetary easing cycle. If this were to occur, we believe it could introduce downward pressure on the U.S. dollar and result in a broad weakening against G10 currencies.”
“Political pressure on the Fed has some potential to erode central bank independence in the United States. Although we do not believe the Fed is responding directly to political pressures, politics could potentially have an indirect influence over the Fed’s monetary policy decisions through market volatility.”