This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.
US President Donald Trump had many reaching for the smelling salts last week when he publicly commented on the strength of the US dollar and then went further by directly criticising current Federal Reserve (Fed) policy, on the basis that it hurts America’s competitive edge.
This comment illustrates nicely one of the contradictions at the heart of the Trump presidency. A strong dollar was one of his policy platforms prior to his election, and as recently as six months ago the president, in an interview with CNBC, said that the dollar would get ‘stronger and stronger’. The previous April, the president had said he was worried about a strong dollar. Now he appears to have gone back to his earlier position, reasoning that a stronger dollar will hurt American exports, and that other countries were keeping their currencies artificially low.
While it seems worrying for investors that the Fed has become the latest US agency to receive criticism from the president, the relationship between the Fed and the White House has not entirely been a bed of roses in the past 100 years. President Trump once criticised the entire Fed committee, while former US president, Lyndon B. Johnson, once held his Fed chairman up against a wall during a disagreement on the path of interest rates.
This takes us down a difficult path – while the Fed is meant to be strictly apolitical, and usually is, its policy decisions do ultimately have an effect on the economy. As Bill Clinton understood, all political questions eventually come back to the economy and how voters view their chances. Trump is aware of this, and for an administration that has tied its success so closely to, not just the economy, but the stock market as well, the Fed’s policy will provoke some disquiet.
Earnings season may reflect this as well. A stronger dollar will likely crop up more and more in earnings calls, as companies worry about competing overseas. Key firms like Halliburton and Apple will be ones to watch, and it is likely that the currency will get much more airtime in these calls than trade wars.
The bottom line is that the Fed plans to continue gradually raising rates, and potentially increasing the speed of its hiking further down the road. A total of four hikes looks likely for this year, and if the pace picks up yet further, then the dollar may see more inflows. A further consideration will be the actions of other central banks; the European Central Bank’s (ECB’s) talk of a rate rise by the end of summer 2019 is an awfully long way off. Meanwhile the Bank of Japan’s (BoJ’s) hawkish phase seems to have passed, and it is very unclear whether the Bank of England (BoE) will go for a hike in August. Even if these three did tighten policy slightly, they will move gradually, as the Fed did when it first hiked rates. The gap in policy between the Fed and the rest may well therefore widen, not narrow.
The dollar’s resurgency may be only just beginning, and that means we could see more disagreements between the Fed and the White House.