Daily Commentary BY THE CURVE TEAM –

It Is All About The Dollar

25th of January, 2018

The US Dollar that is. The Greenback, the world’s reserve currency, has been the driver behind most of the recent moves in markets of late. Comments from the US Treasury Secretary Steve Mnuchin on the USD overnight set the cat amongst the pigeons  and has made Mario Draghi’s job tonight almost impossible.

The USD weakness has been a key theme for markets since the brief pop higher that we saw following Trump’s election victory. As the Trump administration’s America First movement has gathered pace, so has USD weakness. Overnight the US Treasury Secretary Steve Mnuchin commented on the recent acceleration of that weakness and it caught many by surprise.

The long held belief that the US administration advocates for a strong USD was undermined somewhat by his comments after he said:

“The dollar is one of the most liquid markets. Where it is in the short term is not a concern for us at all. A weaker dollar is good for us as it relates to trade and opportunities. Longer term, the strength of the dollar is a reflection of the strength of the US economy and that it is, and will continue to be, the primary reserve currency.”

While he didn’t exactly abandon the long held assumption that the US administration prefers the strong dollar, it was his comment on the short run move and its benefits that caught the market’s eye. That is because it aligns nicely to the current objectives that the administration are striving to achieve. It also highlights that the notion of currency wars is still alive and well.

Consequently as well, the comments make ECB President Mario Draghi’s job tonight even more difficult. As I outlined  yesterday following the BoJ meeting, the weak USD is complicating monetary policy objectives for other major central banks.

There is no question that the Eurozone is doing well from a growth perspective, even if inflation isn’t rising as a result. What this is implying is that the need for emergency monetary policy settings has now past.

The problem for the ECB however, like the BoJ, is that the soaring value of their currency is already tightening overall monetary policy settings. If the ECB is to flag a change in their official stance, they will only put more upward pressure on the currency. The effects of which could place headwinds on growth before they get a chance officially adjust policy.

The ECB announcement is due late tonight. While no change in the current setting of monetary policy is expected, the market will be hanging on Draghi’s every word.

David Flanagan

Director - Interest Rate Markets