USD:  limited scope for additional gains seen - Commerzbank

The dollar is still being boosted by the Trumpflation effect, but there is not much further scope for gains, said Thu Lan Nguyen, analyst at Commerzbank. This is partly because the incoming US President's plans for trade and foreign policy involve risks to the economy.

Key Quotes

“The greenback is still feeling the positive impact of the prospect of an expansionary economic course under the incoming US President Donald Trump and the resulting rise in inflation, also known as Trumpflation. Market players are hoping that this in turn will allow the Fed scope to raise rates more rapidly than it has been doing. Two rate hikes this year and two next year have meanwhile been factored in by the market. The latest highly encouraging US economic data will no doubt have reinforced this view held by most investors. The surprisingly buoyant ISM PMI for December, for example, revealed not just a general upturn in US industry but also mounting pressure on prices.”

“The Trumpflation effect can thus be expected to set a continuing limit on dollar depreciation in the coming weeks, but we also see only limited scope for additional dollar gains. The market has already priced in what we regard as a fairly realistic path for rate hikes.”

“There is also major uncertainty as to the exact economic agenda of the future US Administration. Trump's plans for trade and foreign policy in particular are fraught with considerable threats to the real economy. A trade war with China and/or Mexico, for example, would probably do the US economy more harm than good.”

“There is thus a danger of market players focusing excessively on the inflationary impact of a President Trump and overlooking other risks; this seriously increases the threat of a setback for the dollar.”