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The dollar is continuing to ease after experiencing a robust rally during the first half of August. After trading sideways for most of the summer, the greenback surged against most major currencies rallying to 1.13 against the Euro but has since rebounded climbing back above the 1.16 handle. Treasury yields appear to have been part of the catalyst for the decline in the value of the greenback. After hitting 3% in early August, the 10-year treasury yield has since given back approximately 20-basis points drifting down to 2.8%.  

The Interest Rate Differential

The drop in the US 10-year has coincided with a decline in the 10-year yield differential between the US Treasury and the German 10-year bond yield. The yield differential which generally is considered a driver of the EUR/USD currency pair, moved as high as 2.6% in early August, but since has declined nearly 20-basis points dropping to 2.4%.  The change in the differential makes owning the EUR/USD less onerous, as borrowing costs to short the greenback become less intense. The EUR/USD responded with a nearly 3-big figure rally in forex trading as the differential moved in favor of the German bund yield.

Trump is Talking Down the Dollar

President Trump has flipped flopped on the value of the greenback and recently has accused Europe of manipulating their currency. At the same time, the US President is attacking the Federal Reserve as he wants rates to remain low, especially ahead of the mid-term elections.  Trump’s view is not hard to figure out. He wants low oil prices, low interest rates, and a competitive dollar, that allows that the US to export effectively. He appears to be willing to attack allies and trading partners to manipulate the markets himself. He has also accused China of manipulating their currency in an effort to ease some of the recent strength of the dollar versus the Yuan.

The Federal Reserve

The Fed is next scheduled to meet in September. The market is pricing in 100% chance of a rate increase at its next meeting. The market is also pricing in a 65% chance that the Fed will tighten again when it meets in December. Fed Chair Jerome Powell will speak this week at the central banker’s symposium in Jackson Hole Wyoming. He is unlikely to provide any variation from the current Fed path but is walking a difficult tightrope following multiple comments from President Trump about future rate hikes. According to Trump, he will only criticize the Fed if they raise rates as he does not believe it is necessary. Another President in recent history has taken on the Fed in an effort to drive policy for political reasons. George Bush senior was consistently discussing the Federal Reserve in the early 1990’s and believes that large rate hikes ahead of the election, push the US economy into recession which cost him the Presidential election. This is now on Trump’s mind and he does not want the same thing to happen.