The greenback has enjoyed a nice bounce in the era of Donald Trump but the newly minted U.S. president appears hellbent on beating back the buck—at least in the short term, and analysts are predicting more pain ahead for the currency.
In recent weeks, political risk, namely, jawboning from the Trump administration, has rattled the U.S. unit, which coughed up 2.6% in January, marking its biggest monthly drop since March, when it declined 3.6%, according to FactSet data.
The dollar’s downturn comes after the currency, as measured by the ICE U.S. Dollar Index DXY, +0.30% a gauge of the buck against a basket of six rivals, touched a peak of 103.97 as recently as Jan. 3, marking a more-than 14-year high (see chart below).
The dollar has been slipping after soaring in the aftermath of Donald Trump’s election win.
In fact, since that point in early January, the U.S. dollar has shed nearly 4%—a brisk move for a currency in any developed market and even more so for one that is viewed as the world’s reserve currency.
Trump deserves a healthy share of credit for this shift.
After its Nov. 4 lows, the dollar vaulted higher on the back of expectations Trump’s pro-business agenda would revitalize the economy and deliver a fillip to dollars.
But on Jan. 17, currency traders pushed the dollar lower after Trump expressed concern about the strength of the currency, describing it as “too strong,” considering where currencies like China’s yuan USDCNY, +0.0581% and the Japanese yen USDJPY, +0.32% were trading. Yesterday, Trump’s National Trade Council head, Peter Navarro, in an interview with the Financial Times (paywall), sparked a sharp rise in the euro USDEUR, +0.2699% versus the dollar.
The action prompted Steve Barrow, currency and fixed-income analyst at Standard Bank in a Wednesday note to forecast that the roller-coaster ride for the buck would likely end with the buck significantly lower at the end of Trump’s tenure in the White House. Barrow predicts a 10% near-term rise for greenback followed by “a multiyear downtrend that sees this entire rise, and much more, reversed as we head towards the next election.”
Barrow’s thinking is that the Trump’s so-called scapegoating of the dollar doesn’t match with his pledges to boost the U.S. economy. That’s because a healthier economy would likely means higher interest rates and that would draw more traders to bucks in search for richer yields on their deposits.
Part of the Trump’s intention might be to lower the buck, which has been cited by multinational companies as a headwind to selling goods abroad, with the stronger currency meaning goods and services are more expensive to users of other monetary units. A weaker dollar relative to the yen or euro, for example, makes goods imported from those countries more expensive on a relative basis and may encourage consumers to buy domestically, theoretically narrowing the trade deficit, because exports may be cheaper to those buying abroad.
MarketWatch’s William Watts also points to the incompatibility of the Trump administration’s efforts to talk down the buck and its overall hard-charging trade agenda. The problem is that the administration’s calls to implement tariffs or a border-tax regime that would favor U.S. manufacturers would also be expected to significantly boost the value of the dollar.
The jabbering around the dollar by Trump and other members of his administration is atypical but not unheard of. It’s the recent shift of the orthodoxy around presidential talk about their objective for currency levels and markets that may be unnerving to traders.
And there are some signs that the buck is succumbing to some of the recent pressures. In addition to its general retreat, it has fallen below its 50-day moving average, which are trendlines technical analysts often refer to identify shifts in an asset’s momentum. Slipping below the averages suggest that some of the froth is off the buck and implies that it could fall lower still (see chart below):
Dollar slips below 50-day moving average.
That said, the currency remains above its longer-term trend line, the 200-day moving average.
It’s hard to imagine that the dollar can be kept in check for a protracted period, given the global environment. Europe and Asia are both attempting to stimulate their sluggish economies, while the Federal Reserve is on a path toward normalizing monetary policy, which means higher rates. The dollar is likely to climb in that environment.
“I think what we’ve seen over the last couple of years is a U.S. economy that has been on a relative basis stronger than other countries around the world. That has naturally led to a stronger dollar,” former Treasury Secretary Jacob Lew told CNBC during a recent interview.
But there are scenarios in which the dollar could unravel, especially if a trade-war erupts under Trump. Back in the late 1970s, trade partners, including members of the Organization of the Petroleum Exporting Countries, worried about the dollar’s weakness began talking about using alternative currencies as the reserve for assets like crude-oil futures CLH7, +1.53% But such moves can be a challenge, particularly for nation’s like China, which hold so much of their reserves in dollars, or dollar-pegged instruments.
In other words, a falling dollar can ripple throughout the globe. So far, the Dow Jones Industrial Average DJIA, +0.21% and the S&P 500 index COMP, +0.52% continue to bounce around since rising in the wake of Trump’s election win as investors await more clarity from the president and his administration on economic policy.