marctomarket.com / by Marc Chandler / 2017-04-15
The US dollar suffered broadly last week. It fell against the all major currencies and most of the emerging market currencies. There were two main drivers. The first was the heightened geopolitical risks. The US launched a missile strike against Syria’s government forces in retaliation for its use of chemical weapons.
The US also dropped the largest non-nuclear bomb on IS bunkers in Afghanistan. At the same time, it sent an aircraft carrier group toward North Korea. While the fear of that the Trump Administration was going to be isolationist has subsided, there is a concern about unilateralism and the seeming lack of an overarching strategy.
Away from these military developments, the tightening of the French presidential election is contributing to the heightened anxiety. The latest polls show that when the margin of error is taken into account, any of the top four candidates could theoretically make it the second round. This led to a widening of the French premium over Germany.
The second driver was the comments by President Trump complaining about the dollar’s strength. Both the timing and substance of his remarks caught the market off-guard. According to various measures, the US dollar has declined through the first quarter. A few weeks ago, Treasury Secretary Mnuchin signed off on a G20 statement that reiterated the longstanding position the foreign exchange market should not be weaponized. That is to say that countries ought not to seek to boost competitiveness in the foreign exchange market, but that is precisely what Trump did. Despite the strength of US exports, Trump complained that the “strong dollar” was hampering the competitiveness of US firms.
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