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Dollar in a tug-of-war between the Fed and Trump
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Loading...The US dollar spiked to a more than three-week high in the wake of the comments on Tuesday from Janet Yellen, president of the Fed, that prompted markets to assign a higher probability to the prospect of an interest rate hike as early as March.
The reaction of the Fed funds futures market showed relatively muted optimism, with the read across from market levels indicating odds of 23 percent for a March hike, versus 16 percent earlier in the day, and a jump in expectations for a May hike to 50 percent from 38 percent, according to investment bank Jefferies.
Although the upward movement of the dollar makes sense in the context of the latest news from the Fed, short-term view on the dollar is uncertain, given the conflicting forces expected economic policies of President Donald Trump says Richard Falkenhäll, chief FX strategist at SEB.
While the new administration is likely to be more expansionary, because of lower taxes, the Fed may be forced into tightening policy faster. This, in addition to other potential changes such as the introduction of import tax and reduce income abroad should also be positive for the dollar. On the other hand, the administration of Trump prefers a weaker dollar.
In the ongoing debate about the strength of the dollar, followed an international flare last month, Peter Navarro, elected director of the National Trade Council of Trump accused Germany of using other countries to preserve the euro "grossly underestimated". Germany, in turn, vigorously defended the independence to change the interest rates of the ECB.
According to the study, the exchange rate of Germany is 15% undervalued. Global price index compares the fundamental purchasing power parity (PPP) currency to market exchange rates. PPP sees the cost of purchasing a hypothetical basket of goods in different countries. When the basket is worth the same in all countries, so there is balance in the currencies.
The same study shows that the sterling is 9% undervalued because of the failure of last June during the vote on Brexit, and the Chinese yuan is undervalued by 24%.
As a weigh conflicting factors, there is still a risk the dollar to weaken in the short term if the administration fails to meet the high expectations and cause sales of capital market.
However, strong medium-term outlook for US growth and further tightening from the Fed this year will probably support the dollar. Therefore expected euro-dollar traded between parity and 1.05 in the second half of the year, says Falkenhäll.
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