So it is time to attack the Dollar? That was the name of the game yesterday after the Dollar was sent on a wild tumble following comments from Peter Navarro, the head of President Trump’s National Trade Council that Germany was using a “grossly undervalued” euro to gain advantage over the US and its own European Union neighbours. This was later followed by outspoken comments from President Trump himself when he implied during a meeting with senior pharmaceutical bosses that currency devaluation from other countries had increased the probability of drug makers outsourcing their production as he calls on these companies to turn production back towards the United States.
While the USD has stabilised somewhat since the attack on its strength yesterday, investors continue to be kept on their toes towards pricing in some political risk premium into the new US President after getting carried away beforehand on growth promises and these fundamentals are expected to continue driving the markets.
Investors must be aware that the Trump rally was encouraged on promises of economic growth, deregulation, fiscal spending and job creation. Yet there is still a large element of political risk that was ignored with Trump famously known to favour protectionist and other far-right policies. It must also be remembered that in order for this era of protectionism to work,Trump does need a weaker Dollar, otherwise it will become counterproductive to his economic plan as President of the United States. You can promise to cut taxes, deregulate and offer additional incentives to encourage business in the United States, but unless you are as competitive as your competition overseas corporations will continue to favour doing business in locations where operating costs are lower.
Dollar still slipping against emerging currencies
Despite the Dollar having stabilised after suffering heavy losses against its main trading partners, the Greenback is still slipping lower against most emerging market currencies in Asia ahead of the Federal Reserve interest rate decision this evening. While the Federal Reserve is expected to continue indicating their bias towards raising US interest rates higher more than once in 2017, the general consensus is that interest rates will be left unchanged tonight and this is providing support to Asian currencies seen as being the most vulnerable to higher US interest rates.
The biggest risk for the Dollar heading into the US interest rate decision is if the Federal Reserve indicates an air of unease around the unknown fiscal policy agenda of Donald Trump.
British MPs set to vote on Brexit bill
It shouldn’t be forgotten that with Donald Trump continuing to attract all the limelight that MPs in the United Kingdom are set to vote later today on whether to give Theresa May the green-light to get Brexit negotiations underway. Today represents the conclusion of the debate in parliament that has lasted two days and is expected to end with Prime Minister Theresa May being awarded the nod of approval to begin Brexit negotiations, with reports circulating yesterday that May is aiming to invoke Article 50 on March 9.
This should have some ramifications on the British Pound while the recent news that the UK economy is expected to slow down over the next couple of years also provides another risk to investor sentiment.
On a general level however, global economics are being ignored with market volatility being driven by this new era of political risk becoming common across the developed world.