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Chart of the week: The American Dollar is hardly a “very stable genius”

29 January 2018

Bob Cunneen, Senior Economist and Portfolio Specialist

USD vs Trade deficit

Sources: Financial Times, Federal Reserve St Louis  

Asian, European and emerging market currencies have surged against the USD over the past year. The USD has on a trade weighted basis fallen by -9% since the start of 2017 (black line). Even the “little Aussie battler” in our currency has risen sharply to 0.81 cents.

With Wall St at record highs and US interest rates rising more sharply than the rest of the world, the USD should be ascending rather than descending. However Asian and European economic activity is improving at a faster pace relative to the US. Also the US trade deficit continues to increase sharply (inverted red line) which indicates that the USD strength from 2011-2016 damaged US competitiveness.

The second possible explanation for this weak USD is political. Last week Treasury Secretary Steve Mnuchin suggested that  a “weaker dollar is good for us as it relates to trade and opportunities”. Then President Trump reversed that view by stating that the USD is going to “get stronger and stronger”. This shows confusion rather than conviction on what is the Trump Administration’s actual currency policy. The American Dollar is hardly  proving to be a “very stable genius” given this confusion.

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