Image © The White House
- Treasury and the Fed will be the ultimate arbiters of USD direction
- Federal Reserve unlikely to yield to Trump's desires
- US Dollar seen recouping recent losses
Markets are sceptical that Donald Trump can trigger any material depreciation in the value of the US Dollar following recent attempts to talk the currency lower.
The Dollar is seen paring losses suffered on Friday, July 20 when the US President said he was not happy with the Dollar's value and blamed the US Federal Reserve's interest rate policy and Chinese and European currency manipulation for the "unfair" state of affairs.
"China, the European Union and others have been manipulating their currencies and interest rates lower, while the U.S. is raising rates while the Dollar gets stronger and stronger with each passing day - taking away our big competitive edge. As usual, not a level playing field," Trump tweeted.
The tweet sent the US Dollar lower allowing the Pound-to-Dollar exchange rate the chance to stage a climb back to 1.31, having been below 1.30 just 24 hours earlier. The EUR/USD exchange rate menawhile rose to reach 1.1707.
But that the Dollar basket - a measure of broad-based Dollar performance - climbed on Monday and into Tuesday, recouping most of its Trump-inspired losses, is indicative of a market that is not ready to be scared by what the US President has to say.
The obvious question at this juncture is whether or not Trump has the ability to succeed in driving a weaker Dollar?
We have seen time and again that rhetoric can have an impact on currencies, but for a limited time. What is important is that the rhetoric is backed up by real action.
If not, the bluster loses its impact.
Therefore the US President must come up with a strategy of materially weakening the Dollar if he is to succeed in bringing it down on a sustainable basis.
"The Treasury and the Fed will be the ultimate arbiters of USD direction," says Mazen Issa, Senior FX Strategist with TD Securities. "As such, his sentiments are unlikely to yield much in terms of a sustainable impact on the USD direction beyond the initial knee-jerk reaction observed last week."
Though Trump's comments reintroduce the politicisation of the Federal Reserve, "policymakers will be undeterred," adds Issa.
This week's US GDP for Q2 is expected to be quite firm, and may help to reinforce the need for the Fed to continue to tighten policy, which would only add to the case for further US Dollar strength.
Analyst Adam Cole with RBC Capital Markets meanwhile briefs that "the risk of the Federal yielding to political pressure is minimal."
We agree with this view - there is very little chance the Federal Reserve will yield to the President and they will likely maintain their current policy stance to deliver a slew of further interest rate rises.
What would shift the Fed's stance is a slowdown in economic activity, and for Trump this would be considered a sour turn of events.
However, Viraj Patel at ING Bank N.V. does nevertheless believe a top in the Dollar might have been reached, even if events of recent days don't represent the start of a deeper correction lower in the currency.
"The administration's desire for a weaker US dollar shouldn't come as much of a surprise to markets – we've heard this before. But we suspect the President's comments will almost likely put an end to the USD rally," says Patel.
ING say the President's comments are more likely to, on the margin, stem flows into USD assets given renewed uncertainty over the US administration’s Dollar policy – "and we're unlikely to see the same degree (and sharp extent) of USD weakness that we saw the last time administration talked about the Dollar."
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