America First, Dollar Last Says Deutsche Bank

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Posted: Apr 10, 2018 10:41 AM
America First, Dollar Last Says Deutsche Bank

Deutsche Bank says Trump's America First policy puts the dollar last. BMO predicts a flattish dollar.

Let's investigate the claim Trump's ‘America First’ Puts the Dollar Last.

The administration’s “irreconcilable” goals of cutting trade imbalances while funding a large fiscal stimulus program pose the biggest challenge to the international monetary system since the breakdown of the Bretton Woods agreement in the 1970s, George Saravelos, global co-head of FX research at Deutsche Bank, wrote in a note. The only way to resolve these conflicting objectives is via a weaker dollar, he said.

That’s because the U.S. will probably struggle to attract sufficient foreign capital to fund its twin deficits, and that lack of appetite will likely translate to more currency weakness, he said.

One Variable Analysis

The problem with Saravelos' analysis is that it focuses on one variable. Call the "twin deficits" the budget deficit and the trade deficit two variables if you like.

Possible Action-Reactions

  1. The Fed could hike rates faster than expected, and that would be dollar supportive. In theory, tariffs will raise inflation, forcing the Fed to hike faster.
  2. The ECB could slow tapering or hike slower than expected, and that would be dollar supportive.
  3. There could be a currency crisis starting in Japan, Italy, or China, that could strengthen the dollar.
  4. The Fed could hike rates slower than expected, and that would pressure the dollar.
  5. The ECB could hike faster than expected.

Those ideas are not mutually exclusive. Two and four can both happen. It's also what I expect.

The least likely item above is point number 5.

Looking back at point one, there are short-term and long-term impacts of Trump's policy. Perhaps there is a whiff of inflation with rising interest rates, then a global recession.

A currency crisis is a given at some point, we just do not know when. It could be a decade away or start three months from now.

Air Pocket

Click here to view the chart.

Technically speaking the dollar is in the middle of no man's land. The last four times the US dollar index has been at this level, it has broken lower. The next level of support is not until 80.

Note the classic double-bottom at 71-72. If the dollar breaks that level, look out below. I do not think we get that far but a target of 80 seems reasonable.