Above: Donald Trump says he wants a strong Dollar © Gage Skidmore
Pound-to-Dollar exchange rate is off recent highs thanks to comments made by US President Donald Trump. But weakness is forecast to be temporary.
US Treasury Secretary Steve Mnuchin Wednesday sank the Dollar saying at the Davos conference "obviously a weaker Dollar is good for us".
Then, Trump's appearance at the same event on Thursday, January 26 saw him add to the debate, only with a different message to his Treasury Secretary saying, "the Dollar is going to get stronger and stronger. And ultimately, I want to see a strong Dollar."
The GBP/USD exchange rate faded off its multi-month high at 1.4346 and finds itself at 1.4234 at the time of writing. The US currency also managed to claw back some of the losses suffered against the Euro in the wake of the ECB press conference - EUR/USD went as high as 1.2537 but is back down to 1.2453.
"The Dollar’s biggest gains were against GBP, which plunged on Trump’s statement," says Marshall Gittler with ACLS Global. "It’s been recovering somewhat ever since, though."
In a mirror image statement to what Mnuchin said, UK Chancellor of the Exchequer Hammond said that the UK is “very happy with where the currency is at the moment,” but owing to its strength, not its weakness.
Hammond explained that the stronger Pound will help to reduce inflation and boost real wages.
"I expect the Pound to continue to recover today," says Gittler. Indeed, so far Gittler looks to be on the money with the currency moving higher against most rivals thanks to a solid set of UK GDP data that came in well ahead of expectation and confirms the economy continues to defy gloomy Brexit forecasts.
But be aware, the outlook has certainly improved for the Dollar.
Trump's comments should ultimately help dampen the building perception amongst market participants that the Trump administration favours a weaker US Dollar as part of their America First policy agenda.
He also stated that Treasury Secretary Mnuchin’s comments regarding the benefits from a weak US Dollar in the near-term have been “misinterpreted”.
What is important to note is that any concerns of a coordinated attempt by the US administration to massage the Dollar lower appear misplaced, "It seems clear that the US administration is not purposefully sending any coordinated message on the US dollar, even if there are many fundamental reasons to like it lower," says John J Hardy, Head of FX Strategy at Saxo Bank.
In a further development, Trump surprised markets by suggestung he would be open to re-joining the Trans-Pacific Partnership "if we made a much better deal than we had".
"The comments could also help to temporarily ease some of the building concern amongst market participants over a shift to more protectionist US trade policies. In light of President Trump’s intervention, we now believe that downside risks for the US Dollar have diminished in the near-term and they should help to dampen the recent pace of depreciation," says Lee Hardman, a currency analyst with MUFG.
Analysts at Bank of America have meanwhile reiterated their view that a US Dollar rebound could potentially be on the cards, citing internal forecasts that the Federal Reserve will raise interest rates faster than the market gives it credit for this year and a possible reversal of recent Euro strength.
"In our view, corporate flows could be the catalyst that unwinds extreme long EUR positioning and ignites a USD rally. We continue to monitor this potential development closely," say Bank of America in a recent note.
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