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Dollar hits fresh 3-year lows

By David Morrison  |  25/01/2018 16:38
”dollarplunge”/
This article looks at the plunge in the dollar and the prospect of Trump escalating a trade war

Weak dollar policy

Today’s most important development (as far as financial markets were concerned) wasn’t that US stock indices were once again roaring to fresh all-time record highs. Rather, it was another plunge in the US dollar. The latest decline followed comments this morning from US Treasury Secretary Steven Mnuchin at the World Economic Forum in Davos. Usually US government officials go out of their way to “talk up” the dollar. However, Mr Mnuchin pointed out the obvious when he said that dollar weakness “is good for us as it relates to trade and opportunities.” He went on to insist that ultimately the dollar would strengthen as a reflection of US economic strength and as it continued to be the world’s reserve currency.

Trade tariffs spark anger

Mr Mnuchin’s comments followed an announcement from President Trump on Monday of tariffs on the imports of solar panels and washing machines, a move which has riled US trading partners China and South Korea. In addition, Commerce Secretary Wilbur Ross said that further tariffs were being considered and this is the backdrop against which Mr Trump will address Davos delegates on Friday.

“America First”

There are concerns that the US administration is looking to escalate a trade war and the big question now is how China and other exporters respond. It could be that Trump is making all this noise now in an effort to engineer more favourable trade deals in the future with dollar weakness acting as a catalyst to get all sides talking. But there’s a danger that it may not work and that Trump’s “America First” agenda leads to retaliation. Just a few weeks ago China appeared to indicate that it was considering halting, or even reducing, its purchases of US Treasury bonds.

Dollar looks oversold

For now, there seems to be little reason to buy the dollar – other than it’s looking oversold. The greenback has spent the last fortnight hitting a succession of fresh multi-year lows against the euro and this has seen the EURUSD briefly poke its head above 1.2400 marking a three year high. Meanwhile the Dollar Index has lost 14% over the past twelve months. This afternoon it broke below 89.00 to hit a fresh three-year low while this morning the USDJPY dropped below significant support around 110.00.

Sterling soars

Cable has soared today and is now back at levels seen in early 2016, before the UK referendum on EU membership. In addition, the GBPUSD is trading way above the double bottom hit in the first quarter of 2009 at the height of the financial crisis. Sterling also broke lower against the euro this afternoon, breaking below support around 0.8760 suggesting that investors are feeling well disposed towards the pound generally. Today’s sharp rally suggests that traders and investors are comfortable in pushing the pound higher. However, the move since the beginning of this year looks overextended and a period of consolidation is overdue. 
 

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