Trump to be sworn in today, dollar in focus - BBH
Analysts at BBH note that the 45th President of the United States will be sworn in today, and the heavy cloud of uncertainty over priorities and policies will begin being lifted.
Key Quotes
“Much of the focus in the media has been soon-to-be President Trump's comments about the dollar being too strong, partly because of the Chinese yuan. Mnuchin, the Treasury Secretary nominee, sought to clarify Trump's remarks, suggesting that they were not meant to be a long-term policy endorsement. Indeed, at the ECB's press conference yesterday, Draghi reminded reporters of the G20 consensus to refrain from competitive devaluations.”
“The dollar's rise, which some trace back to mid-2014, has little to do with the strong dollar policy. In fact, many have poked fun or ridiculed the strong dollar policy in the first place, though it has not stopped some of the same observers who now are suggesting that it is being abandoned. On the other hand, we have argued that the strong dollar policy was meant to assure investors and the world that the US would not seek to devalue the dollar to promote trade or ease its debt burden.”
“Also, we note that many observers who argued that there has been a currency war for several years now are also playing up Trump's comments as if some threshold has been only now crossed. We have argued that there has never been a currency war. The pursuit of a monetary policy to stimulate or support domestic economic activity, we argued, is not a currency war, even if the currency falls as a consequence.”
“There is a risk that if the US abandons the G7 and G20 best practices of letting the markets determine exchange rates and does actually begin to talk the dollar down, other countries will follow, and a genuine currency war and trade war could be ignited. It is far too early to draw strong conclusions about the Trump Administration's dollar policy, or nearly any policy for that matter. That said, we recognize that many of the economic team is pro-growth and favor reducing regulation.”
“Our constructive outlook for the US dollar is based on the divergence of monetary policy, broadly understood, and the political risks emanating from Europe. Since the spring, we have anticipated that the next US administration would complement the less accommodative monetary policy with fiscal stimulus and recognized the bullish implications of the policy mix. Our view then puts emphasis on interest rates in absolute terms and also relative to Europe and Japan.”