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Category: U.S. Dollar
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.
14-Dec (Reuters) — The U.S. dollar hit its highest level against the yen in 10 months and gained against other major currencies on Wednesday after the Federal Reserve raised interest rates for the first time this year and signaled a faster pace of increases in 2017.
…”The rise in the dollar is really being driven by the shift from two to three hikes next year, which obviously isn’t priced by the market,” said Ian Gordon, FX strategist at Bank of America Merrill Lynch in New York.
“The overall tone of the statement is generally still somewhat cautious,” Gordon added. He cited the Fed’s reference to risks to the economic outlook as having been roughly balanced, as well as discussion of the shortfall in inflation, as examples.
PG View: At some point the strength in the dollar has the potential to completely derail the recovery. That, along with surging rates, makes it increasingly more difficult to manage our massive debt load.
01-Dec (Reuters) — A perceived crack in Britain’s “hard Brexit” line on leaving the European Union dominated trading on major currency markets on Thursday, driving the pound 1 percent higher and helping spur a retreat in broader measures of the dollar’s strength.
Sterling surged 1.2 percent to a three-week high of $1.2663, also hitting an almost three-month high of 83.95 pence per euro after Brexit minister David Davis said Britain would consider paying into the EU budget for market access.
18-Nov (WSJ) — The dollar extended its powerful rally Friday, a move that poses new risks to budding optimism about the economy following the U.S. election.
The U.S. currency moved closer to parity with the euro and higher against the yen. In recent days, the dollar has pushed exchange rates lower for emerging markets around the world.
The dollar is rising fast as investors bet that fiscal spending and tax cuts proposed by President-elect Donald Trump will spur U.S. economic growth, and the rising probability that the Federal Reserve will raise interest rates next month. Federal Reserve Chairwoman Janet Yellen said on Thursday that the Fed could act “relatively soon.”
The gains make foreign goods and travel cheaper for U.S. consumers and could give a boost to exports from Japan and Europe. But they also are reigniting fears that the dollar’s strength could slow U.S. corporate profit growth and intensify capital flight from the developing world, which would complicate the prospects for an economic rebound.
The fast move has set off reactions by monetary officials around the world. Indonesia’s central bank has intervened by selling dollars in hopes of slowing the rupiah’s slide. Malaysia, faced with a deep drop in the ringgit, cracked down on trading in the futures market in an effort to damp speculation on the currency. China intervened as well, setting the yuan for several days but using state-owned banks to prevent the currency from falling too far.
Mexico’s central bank raised interest rates on Thursday as the country grapples with a weaker peso and uncertainty over the future of its relationship with its largest trading partner.
“The strong dollar is destabilizing for markets, for foreign assets, for emerging-market nations that pay back their debt in dollars, “ said Jonathan Lewis, chief investment officer at Fiera Capital Inc. “That’s pretty significant.”
PG View: And a rate hike in December — with a hint of more to come — will only further buoy the dollar.
15-Nov (FT) — The only reliable guide to the dollar’s value in the wake of Donald Trump’s electoral victory is the wisdom of legendary investor Bernard Baruch about the stock market: it will fluctuate. If the prospects for the US economy have never been so uncertain, then the prospects for the dollar similarly have never been so uncertain.
Still, we can attempt to make sense of this scenario from three angles. A first is from the vantage point of US fiscal and monetary policies. One thing we know is that a more expansionary fiscal policy is coming. It may take the form of tax cuts for the wealthy and tax credits for investors; or it may be a more balanced programme, including a significant rise in infrastructure spending.
Either way, growth and inflation are likely to accelerate, and the US Federal Reserve will respond by raising interest rates sooner and faster. We know from the Reagan era that a mix of loose fiscal and tight monetary policies makes for a strong dollar. No surprise, then, that investors are bidding up the greenback.
But we also know that doubts about debt sustainability can lead those investors to think twice. Large, unfunded tax cuts will heighten their doubts. Questions about fiscal sustainability will be particularly troubling to investors in US Treasury bonds, given Mr Trump’s offhand comments about renegotiating the debt.
Thus the macroeconomic policy mix should be dollar supportive in the short run but dollar subversive in the longer term.
PG View: Regarding the safe-haven status of the dollar, Professor Eichengreen writes, “A currency is regarded as a haven only if the country issuing it is geopolitically secure. It must have a strong military but it also must have strong alliances.”
Or you could just buy gold.
03-Nov (Bloomberg) — The dollar weakened for a fifth day, its longest stretch of losses in four months, and a gauge of currency volatility rose to near the highest in two months amid mounting anxiety over the outcome of the U.S. presidential election.
A JPMorgan Chase & Co. index of global currency swings rose to 10.39 Wednesday, the highest level since Sept. 14, as the race for the White House between Democratic nominee Hillary Clinton and Republican candidate Donald Trump tightened less than a week before Americans head to the polls. The greenback fell Thursday against the British pound, which surged the most since August after a U.K. court ruled the government must hold a vote in Parliament before starting the two-year countdown to Brexit.
“Politics is clearly asserting itself as the biggest driver in global markets,” said Alan Ruskin, global co-head of foreign-exchange research in New York at Deutsche Bank AG. Traders are either “selling the dollar or taking back long dollar exposure. It’s extraordinary how much the narrative has shifted.”
PG View: But, but U.S. interest rates are surely going higher before the end of the year . . . aren’t they?
25-Oct (Bloomberg) — The dollar rose to a seven-month high as traders ratcheted up bets on a Federal Reserve interest-rate increase by year-end.
The greenback appreciated against its major counterparts for the fourth straight day and extended its October gains. The probability of a Fed interest-rate increase by December rose to 74 percent, the highest since June, futures data compiled by Bloomberg show.
The advance suggests that currency traders have yet to fully price in the prospect of higher U.S. rates in coming months, signaling that the dollar may have room to extend gains that began in August amid evidence of faster economic growth and accelerating inflation. Chicago Fed President Charles Evans said Monday that if the economy continues to grow in line with his forecast, it may be appropriate to raise rates three times by the end of 2017.
“It’s a fairly straightforward Fed-expectations move,” said Adam Cole, head of global foreign-exchange strategy at Royal Bank of Canada in London.
07-Sep (Bloomberg) — Kenneth Rogoff has an interesting résumé: international grandmaster of chess, former chief economist of the International Monetary Fund, professor at Harvard University. And he is now—unofficially—the No. 1 enemy of cash.
“I’ll admit, it’s a very quirky topic,” Rogoff said at a press lunch on Tuesday put together by the publisher of his new book, The Curse of Cash. But he insists that a country without most cash is an idea whose time has come.
Law-abiding citizens rarely have need for $100 bills, yet there are 34 of them in circulation for every woman, man, and child in the U.S. That suggests the bills are circulating mainly in the underground economy. If the biggest bill were worth $10, rather than $100, delivering someone a million bucks under the table would require a 220-pound chest rather than a 22-pound briefcase. Forcing people to use smaller bills, Rogoff argues, might make crime more conspicuous and less convenient.
Rogoff also contends that suppressing cash would make it easier for the Federal Reserve and other central banks to boost economic growth by pushing interest rates into negative territory. That’s the strange world where you pay to keep money in the bank and get paid to borrow it. The theory is that negative rates will induce people to save less and spend more, which will revive growth. Savers won’t tolerate negative interest rates on their savings as long as cash is an alternative. Why not simply withdraw stacks of $100 bills and keep the cash in a mattress or a safe?
Rogoff says he doesn’t want to get rid of cash all at once. First, he would phase out 100s, then 50s, then 20s, leaving smaller bills in circulation for the foreseeable future. “I want to have a less-cash society, not a cashless society,” he said.
PG View: So in this scenario, where would one store some of their wealth if they were disinclined to have it all in the banking system? In gold of course.
If you haven’t done so already, I encourage you to read Jim Rickards’ The New Case for Gold.
Gold has retraced half of today’s intraday retreat, dollar rebound falters as markets discounts Dudley’s hawkish bluster.
10-Aug (Reuters) — The dollar fell against a basket of currencies on Wednesday as investors re-evaluated whether the Federal Reserve will raise interest rates this year, which also sent the higher-yielding Australian dollar to its loftiest level since late April.
The U.S. dollar sagged against the euro and the yen after downbeat productivity data sapped some of the momentum it had gained from last week’s robust jobs report.
U.S. Treasury yields fell after the productivity report suggested the economy may not be growing as quickly as anticipated, prompting investors to cut long-term inflation expectations. According to CME’s Fedwatch, investors have trimmed chances of a rate rise in December 2016.
The dollar was down 0.6 percent at 101.28 yen, having gone as high as 102.66 on Monday on the strong non-farm payrolls data. The euro rose 0.5 percent to $1.1173, touching a 5-day high of $1.1184.
The dollar index dropped 0.6 percent to 95.577.
“The release of the third consecutive decline in quarterly U.S. productivity – the worst run since at least 1980 – does not bode well for the prospects for the dollar,” Morgan Stanley head of currency strategy, Hans Redeker, said.
PG View: The dollar has retraced all of its post jobs report gains. Odds of a September rate hike are back down at 12%.
20-Jul (MarketWatch) — Think of it as the breakup. Gold’s historical relationship with the U.S. dollar has been going through a bit of a separation.
The precious yellow metal often trades inversely with the ICE U.S. Dollar Index a gauge of the dollar’s strength against a basket of six rival currencies, as moves in the U.S. unit can influence the attractiveness of gold to holders of other currencies. In other words, gold tends to rise when the dollar weakens.
However, that normally tight relationship has been under some serious stress, lately.
Some market participants point to global central-bank monetary policies and the U.K.’s decision to exit the European Union for the shift in the relationship, which has seen gold, at times, swing higher or lower, despite moves in the buck.
“You can trace the shift to positive correlation between gold and the [dollar] back to the Brexit vote,” Paul Wong, senior portfolio manager at Sprott Asset Management, told MarketWatch.
…“Since the Brexit result, the correlation has been rising to [new] multiyear highs,” said Wong. “Historically the negative correlation between gold and USD was very pronounced—the only time positive correlation occurred was during times of extreme financial stress when both assets were considered to be safe havens.”
That was the case during the financial crisis of 2008, when gold and U.S. dollar traded “hand in hand,” said Nico Pantelis, head of research at Secular Investor.
“Today, the U.S. dollar is trading relatively high, but gold is getting a [bid] as investors are buying gold again in large amounts,” he said. “So today, the price of gold is trading as a function of demand, like it normally should.”
PG View: Today the old inverse correlation seems to have returned. We’ll see if it lasts . . .
19-May (Bloomberg) — As soon as the Federal Reserve released meeting minutes describing a weaker dollar, the currency surged to a seven-week high.
That’s the dilemma facing U.S. central bankers, who are weighing economic data to determine when next to raise interest rates. The Fed’s signals of a potential June move may backfire if the resurgent greenback undermines growth and weighs on stocks and oil prices, ultimately eroding the case to boost borrowing costs.
The dollar’s surge since mid-2014 hurt the outlook for growth and inflation, and contributed to the Fed delaying to December its liftoff from near zero, according to strategists. Officials from Janet Yellen to Stanley Fischer have warned that the dollar’s appreciation will limit the pace of tightening.
“The Fed’s in a bind,” said Douglas Borthwick, the New York-based head of currencies at Chapdelaine & Co., a unit of the British interdealer brokerage Tullet Prebon Plc. “The Fed can’t raise rates because it means a stronger dollar, and it means deflationary pressure in the world. The Fed’s under pressure to talk a mighty game, but it can’t actually do a lot.”
…“The Fed’s very thought of a June increase — much less the signals it may have been trying to convey to decrease the risk of complacency — could reverse some of the very trends they liked so much,” said Jim Vogel, head of interest-rate strategy at FTN Financial in Memphis, Tennessee.