Trump may want a weaker US dollar but will he get it? - MUFG

Lee Hardman, Currency Analyst at MUFG, notes that the foreign exchange market continues to be mainly driven by the ongoing assessment of President elect Trump’s likely policies ahead of his inauguration. The US dollar has corrected lower early this year resulting in the dollar index falling back towards the 100.00-level which leaves it broadly unchanged over the last couple of years. The US dollar has been undermined by the recent shift in the market’s focus on to President elect Trump’s more protectionist trade policies. It is challenging the market’s initial favourable view that the US dollar will strengthen on the back of looser fiscal policy and tighter monetary policy in the year ahead. 

He further writes, "The market has become more aware that President elect Trump is likely to favour a weaker US dollar alongside more protectionist trade policies in an attempt to help boost the US manufacturing sector. In an interview with the WSJ, President elect Trump expressed concern that the US dollar was too strong compared to the renminbi which is killing US companies’ competitiveness. He blamed China for holding down their currency even as they have been intervening to support it in recent years. While the reference to the strong US dollar was specifically referring to the renminbi cross, it has heightened concern that he could also express concern over the broad-based strength of the US dollar."

Key Quotes 

"Nonetheless, it appears that the Trump reflation trades including expectations for a stronger US dollar against other major currencies are built on increasingly firm fundamental foundations. The global economy had already returned to stronger growth ahead of the election victory for Donald Trump. The pick-up in global growth in the second half of last year was most notable in advanced economies such as the US. Global inflation pressures are also picking up driven by the rebound in commodity prices which are supported by stronger global growth. Leading indicators of business confidence have since strengthened further providing an encouraging tentative signal that global growth could surprise to the upside in the year ahead." 

"The improving global growth outlook is one reason why we believe that emerging market and commodity related currencies in general have been able to better withstand the recent sharp adjustment higher in US yields. It also supports our outlook for emerging market and commodity related currencies to outperform relative to current bearish consensus forecasts."

"The improving global growth outlook is one reason why we believe that emerging market and commodity related currencies in general have been able to better withstand the recent sharp adjustment higher in US yields. It also supports our outlook for emerging market and commodity related currencies to outperform relative to current bearish consensus forecasts."

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