Analysis

Trump's Fed Comments Represent USD Top

In an interview with CNBC, President Trump said he's "not thrilled" with the Fed raising interest rates and noted that the Chinese yuan is "dropping like a rock." 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 Trump's comments will most likely mark a top in the USD's rally.

Thoughts On Trump's Dollar Jawboning

We suspect the president's comments on US interest rates and currency markets will almost likely put an end to the USD rally – and in the absence of any immediate escalation – will be a mini lifeline for EM and risky currencies elsewhere. We’ve always been wary of the administration’s desire for a weaker USD and that USD weakness could become self-fulfilling if that is the White House’s objective.

Indeed, this draws parallels to what we saw in January 2018 when Treasury Secretary Mnuchin let slip about a “weak US dollar.” Moreover, Donald Trump's views shouldn’t be news to USD markets as we heard the president talk down the US dollar and cite a desire for low interest rates back in April 2017. The White House may be running damage control by quickly coming out with a statement that the president "respects the independence" of the Fed.

Political Economy Of A Weak Dollar Is Medium-Term Negative

While back in January the DXY fell about 5% in a short window (with Secretary Mnuchin’s comments partly adding fuel to the weak USD fire) we shouldn't get too carried away. While the USD's political economy is a medium-term negative, the fundamental outlook for major currencies like the EUR, JPY and CNY is considerably weaker relative to January 2018, when markets were dominated by the theme of synchronized global growth, in which current trade wars have dented. As such, the president's comments are more likely to, on the margin, stem flows into USD assets given renewed (explicit) uncertainty over the US administration’s dollar policy. Still, we're unlikely to see the same degree of weakness that we saw back in January.

Bottom Line: A Top In USD Rally But No Material Decline For Now

With USD's short-term fundamentals having already started to turn before President Trump's comments – Fed Chair Powell merely gave the dollar one final push – we think this probably marks a top in USD's rally in the absence of any further near-term escalation in the global trade war narrative. It'll certainly sow more seeds of doubt into global investors when assessing the outlook for USD assets. It's likely that major FX pairs return back to trading within current (narrow) ranges.

We look for EUR/USD to stay within the 1.15-1.18 range for the rest of summer, while the odds of USD/JPY moving above 114-115 have been greatly reduced.

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