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Category: U.S. Dollar
Russia’s largest bank, state-owned Sberbank, announced that its Swiss subsidiary had begun trading in Gold on the Shanghai Gold Exchange.
Russian officials have signaled that they plan to conduct transactions with China using Gold as a means of marginalizing the power of the USD in bi-lateral trade between the 2 powerful nations.
The formation of a BRICS Gold marketplace could bypass the US Petrodollar in bi-lateral trade in the energy sector.
PG View: This is a big positive for gold, and bad news for the dollar.
Political gridlock in Washington is giving traders a fresh excuse to sell the dollar. But the outlook for central-bank policy is still its biggest threat.
The currency fell to a 10-month low Tuesday after Republican efforts to overhaul health care collapsed, sowing doubts about the prospects of President Trump’s economic agenda. Yet for all the focus on politics, shifting expectations for interest-rate differentials are at the root of the dollar’s 8 percent slide this year. Case in point: The yield advantage on 10-year Treasuries over German bunds has crumbled to the slimmest since November.
The weaker dollar is standing out front and centre on global markets as doubts about the Trump administration’s ability to enact its pro-growth policies of tax cuts and fiscal stimulus follow the demise of set-piece legislation to repeal Obamacare.
There is broader concern that the fillip given to global stocks by the prospect of reflationary policies in the US could have run too far, hitting European stock indices, although sovereign debt markets are calm, with yields holding steady.
…The dollar index, a trade-weighted measure of the US currency, dropped to its lowest level since September 2016, down 0.5 per cent at 94.629.
The dollar sank to a fresh 10-month low after closely watched gauges of U.S. inflation and retail sales missed estimates, casting a cloud over the outlook for monetary policy just days after testimony from Federal Reserve Chair Janet Yellen.
The U.S. currency declined versus its G-10 peers and was lower by almost 0.7 percent, its steepest drop since June as measured by the Bloomberg Dollar index. Amid broad greenback weakness, the Australian dollar rose to a 15-month high above 0.7800 and the pound reached its strongest in almost 10 months, approaching 1.3100.
…The odds of a Fed hike by year-end dropped to around 40% Friday, after Yellen testimony this week that the funds rate wouldn’t have to rise much to reach its neutral level. The FOMC meets July 25 and 26 and is expected to remain on hold after raising rates in June. Next week will also see the start of monthly housing data.
Gold jumps back above 200-day MA as more weak data further erodes Sep rate hike expectations. Dollar index falls to 10-month lows.
The U.S. dollar hit a more than nine-month low against the euro on Tuesday after the head of the European Central Bank opened the door to steps that might begin to reduce the central bank’s emergency stimulus to the economy.
Speaking to a conference in Portugal, ECB President Mario Draghi said the ECB could adjust its policy tools of sub-zero interest rates and massive bond purchases as economic prospects improve in Europe.
But any change in the bank’s stance should be gradual, as “considerable” monetary support is still needed and the rebound in inflation will also depend on favourable global financing conditions, he added.
The dollar sagged against its major peers on Monday, losing traction as U.S. Treasury yields stayed low amid fading expectations that the Federal Reserve to hike interest rates again later this year.
…The index had climbed to a one-month peak of 97.871 earlier last week, supported by expectations that the Fed, fresh from a mid-June rate hike, would tighten policy again as early as September.
But such expectations ebbed over the course of a week, with investors doubtful of another rate increase this year as U.S. data on balance have fallen short of forecasts.
“The main reason behind the weakness of the dollar, which has lost its upward momentum since the Fed rate hike, is U.S. yields stuck at low altitude,” said Junichi Ishikawa, senior FX strategist at IG Securities in Tokyo.
The dollar fell against a basket of major currencies on Friday, recording its biggest one-day fall in three weeks, on persistent doubts whether the Federal Reserve would raise interest rates again this year due to softening inflation data.
The greenback also broadly weakened versus commodity-linked currencies, which got a boost as global benchmark Brent futures recovered from a seven-month low.
…Traders, however, were doubtful about another rate increase later this year as recent U.S. data on balance have fallen short of forecast.
Rises in U.S. interest rates will probably prop the dollar up over the next 18 months, but its multi-year run higher since 2012 looks to be over, strategists from British bank Barclays said in a note on Thursday.
…”We believe the USD super-cycle of the past five years is over: the cyclical divergence that helped the dollar in these years has likely peaked, not only because of the European recovery, but also because the U.S. business cycle is more advanced than in Europe,” Barclays said in an updated global outlook dated June 22.
The euro has recouped most of its earlier losses. The corresponding intraday retreat in the dollar has bolstered gold.
The US dollar slipped to its lowest since the election of Donald Trump last November after a miss in the country’s job creation numbers in May.
At publication time, the dollar index was down 0.52 per cent against a basket of its major trading peers at 96.720 – the weakest since president Trump’s election.
The dollar was holding steady before the payrolls report which showed the US economy added 138,000 jobs last month (forecast: 185,000). Still May’s growth was enough to push the US’s overall unemployment rate from 4.4 per cent to 4.3 per cent – the lowest since 2001.
PG View: And gold is setting new 5-week highs.
The euro climbed to a fresh six-month high on Monday as the currency rebounded against the US dollar.
…The moves came after Angela Merkel, the German chancellor, told school students in Berlin that “the euro is too weak”, which she attributed to European Central Bank policy.
“The context she was saying this in was in her description over why Germany has such a high trade surplus but the euro moved anyway,” said Peter Boockvar, chief market analyst at The Lindsey Group.
The US dollar index is down by 0.2% at 97.890 as of 9:46 a.m. ET on Wednesday.
That brings the dollar back to roughly where it was just before the US presidential election. The index closed at 97.861 on November 8, the day of the election, according to Bloomberg data.
Analysts have suggested that the currency is suffering from the tumult of news coming out of the embattled Trump administration in the wake of the firing of FBI Director Jim Comey and bombshell reports that the president shared classified information with Russian Foreign Minister Sergey Lavrov and Ambassador Sergey Kislyak.
In particular, markets may be worried that the recent developments could stall the economically stimulative tax and infrastructure policies many investors hoped for after the election.
PG View: Are stocks destined to retrace their gains since November as well?
Goldman Sachs abandoned the two strong dollar plays in its 2017 trading recommendations on Tuesday, pointing to the Trump administration’s concerns over the strength of the currency and improvement in growth in rival economies.
“… a number of fundamentals have changed on the margin, such that the long-Dollar story no longer warrants a place among our ‘Top Trades’.”
PG View: If the dollar is out, it begs the question: Is gold in?
President Trump’s remarks last week about the dollar and US monetary policy offer more evidence that America’s strong dollar policy, launched in 1995 by Treasury Secretary Robert Rubin when the dollar was near post-war lows, is now changing.
The President said that a strong dollar “sounds good”, but added that “our dollar is getting too strong…it is very, very hard to compete when you have a strong dollar and other countries are devaluing their currency”. He also said that he “likes a low interest rate policy” and that Janet Yellen is “not toast”.
President Donald Trump has signaled his preference for a weaker dollar and low interest rates. He may end up with neither if the U.S. economy continues to recover and he delivers on his ambitious agenda of tax cuts and infrastructure spending.
…The bigger question is how Trump can coax the dollar lower and still promise to inject fiscal stimulus, Setser said. “Historically, a bigger fiscal deficit has put upward pressure on the dollar.”
…”I don’t see why the president shouldn’t be allowed to talk about this,” said Joseph Gagnon, a former Fed official who is now a senior fellow at the Peterson Institute for International Economics. “The strong-dollar policy has outlived its usefulness.”
President Donald Trump said the dollar “is getting too strong,” repeating his opinion that the currency’s gain makes American products less competitive globally.
“I think our dollar is getting too strong, and partially that’s my fault because people have confidence in me,” Trump told The Wall Street Journal in an interview published on Wednesday. The dollar jumped to a 13-year high after the November election but has since given back some of the gains.
Trump added that the strong dollar would “hurt ultimately.”
PG View: A sure fire way to knock the dollar down would be for the President to appoint unabashed doves to the open Fed positions. That would give Yellen the cover she needs to get back to her own dovish ways.
Gold jumps to 3-week highs above $1240, as dollar index falls below 100.0 for the first time in 6-weeks.
U.S. Treasury Secretary Steven Mnuchin plans to use his debut at a Group of 20 meeting in Germany next week to drive home the message that the U.S. won’t tolerate countries that engage in currency devaluation to gain an edge in trade, according to people familiar with the matter.
…Mnuchin will also say that the American trade deficit is a sign other major economies aren’t doing their part to support global demand, making the world’s economic growth unbalanced, according to one of the people.
PG View: The dollar has come under more intense pressure intraday, with the dollar index approaching the lows for the week. This is helping to underpin gold ahead of the weekend.
If visibility and predictability are two foundations upon which stable financial markets are built, comments from the White House this week on the U.S. dollar suggest investors should brace for increased foreign exchange volatility.
President Donald Trump and his top trade adviser waded into the debate over the currency’s strength and the damage they say it is doing to U.S. competitiveness, drawing rebuffs from Germany and Japan and casting doubt over the strength of global cooperation on foreign exchange policy.
On the one hand, this should come as little surprise. A key pillar of Trump’s election campaign was to reinvigorate U.S. manufacturing and bring back what he sees as lost jobs. A weaker dollar would be instrumental to achieving that goal.
PG View: If policymakers are successful in reversing the multi-year uptrend in the dollar, gold should benefit. The problem is that most other countries are actively trying to devalue their currencies as well.
Richard Nixon’s Treasury Secretary John Connally once told foreign counterparts that the US dollar is “our currency, but your problem” — a blunt observation that has often rung true. Under President Donald Trump it may no longer be so simple.
…Restoring US manufacturing and improving the trade balance are central to Mr Trump’s plans, and it is clear the administration is concerned over damage a stronger greenback can wreak. The president had already questioned the US government’s longstanding policy to at least voice support for a “strong” dollar, but this week he went further.
FT/Sam Fleming and Shawn Donnan/01-17-17
Donald Trump has threatened to overturn two decades of US economic policy by questioning the strong value of the dollar, raising fears that his presidency could set off a new round of currency wars between the world’s major economies.
On Monday the president-elect appeared to break from the longstanding “strong dollar” policy of successive administrations, declaring that the currency was too high and that this was preventing US companies from competing with Chinese counterparts. “It’s killing us,” he said in an interview with the Wall Street Journal.
PG View: Let’s be honest, our so-called “strong dollar” policy has been a farce. The greenback is in long-term secular decline, like pretty much every other fiat currency. Only within the last several years has the dollar really appreciated; largely as a result of divergent monetary policy. Those gains are eroding the competitiveness of U.S. corporations, which will likely put trade policy high on the Trump administration’s agenda. Speaking in Davos, an advisor to the President-elect, suggest Mr. Trump is likely to tear-up the rulebook on trade.
In a Friday interview with The Wall Street Journal, Trump said the U.S. currency, which touched a more-than 14-year high about two weeks ago, has gotten “too strong,” especially considering the China’s yuan is “dropping like a rock.” “Our companies can’t compete with them now because our currency is too strong. And it’s killing us,” he told WSJ.
Trump’s remarks about the dollar underscore the soon-to-be president’s unconventional political style, and could threaten to roil stocks, which have enjoyed a healthy run higher in recent months. Sitting presidents rarely offer their direct view on the strength or weakness in U.S. currency for fear of influencing the market.
PG View: Today’s weakness in the dollar has pushed gold to an 8-week high and silver is back above $17 for the first time in 5-weeks.
“The fiat money quantity has now breached the $15 trillion level, standing at $15,108bn on November 1st 2016, the last calculable date. This is now $6.3 trillion above the pre-Lehman crisis trend-line, exceeding it by 72%. Instead of the Lehman rescue being a temporary fix, the increase in the quantity of fiat money has continued to grow over eight years later.”
PG View: The proliferation of paper — paper in the form of debt and paper in the form of fiat currency — is one of the primary driving forces behind gold price appreciation over time. I concur with Mr. MacLeod when he says, “gold must be regarded as significantly undervalued relative to fiat dollars.”
“The euro tested fresh 14-year lows against the U.S. dollar Tuesday as investors reacted to a trio of terrorist incidents around the region yesterday that have rattled confidence and raised questions about geopolitical risks in the months ahead.”
PG View: There’s a lot more going on in Europe than the recent attacks. The attempt to rescue Monte dei Paschi via a private deal looks to be falling apart. If that happens, the Italian government will have to step in to bailout the world’s oldest surviving bank and Italy’s 3rd largest lender. That will likely mean the bank’s creditors will likely experience considerable losses. The risks to the broader Italian, European and global banking systems are considerable. And that’s not to mention the current political turmoil in Italy that may at some point lead to a referendum on exiting the EU.
The Japanese yen is tumbling after the Bank of Japan kept policy on hold, as virtually all analysts were expecting.
At its Tuesday meeting, the BOJ said it would continue to purchase Japanese government bonds at an annual pace of about 80 trillion yen to maintain a 10-year JGB yield of about 0%.
Interest rates were also left unchanged at -0.1%.
PG View: While this decision was widely anticipated, and Kuroda seemed a little more upbeat on the economy, it seems unlikely the BoJ will take it’s foot off the gas any time soon. This is helping to push the dollar higher and weighing on gold in the process.
“China’s capital outflows are accelerating and the central bank is selling larger amounts of foreign exchange, Goldman Sachs Group Inc warned as the yuan headed for its biggest annual decline in more than 20 years.”
PG View: As the yuan is driven lower, it is exacerbating the problems arising from recent dollar strength. This is only going to escalate president-elect Trump’s contentions that China is a currency manipulator, strengthening the case for his threat to impose import duties. That in turn could start a trade war. China has already been selling Treasuries and dollars in an alleged effort to shore up the yuan, to the point where China is no longer the top holder of U.S. government debt. That honor goes to Japan, which hasn’t held that dubious title for any sustained period since the financial crisis.
“The greenback extended its advance against major and emerging-market peers after the Federal Reserve’s first interest-rate hike of 2016 came with a signal of three increases next year. Gold tumbled 2.6% to a 10-month low.”
PG View: We have made note of the resilience of gold relative to the recent dollar strength on numerous occasions. The last time the dollar index was at this level, gold was under $350.