On net, prospects for the U.S. dollar’s recent rebound seem shaky as it bides its time for tangible trade de-escalation news. Dollar bulls argue that the dollar requires an unbroken string of good tidings to make further headway. President Trump’s first administration gave us that support. Its comeback still hasn’t matched the robust equity market gains.
President Donald Trump’s administration has played a significant role in bolstering the dollar’s position. On that front, at least, Trump’s largely pragmatic shift in trade policy has exacerbated some of the risks tied to an unstable dollar. In the last week or two, we’ve gotten some recent signs from the President on U.S.-China trade negotiations that have been pretty optimistic. He lauded the dialogue in Switzerland, deeming them “excellent.” This is evidence that we’re moving in the direction of the president’s expressed desire for a “total reset” in relations with China.
Even with all this, the dollar’s momentum may soon face some serious questioning. This change could be a reflection of the real progress, or regression, in ongoing U.S.-China talks. P3 capital markets investors are keeping a close eye as these discussions continue. Should they see any early signs of reversal, the dollar’s present strength would be partially undermined. Support for the dollar may find itself forming a base near the 100.0 level on the DXY index, but things are still developing.
State street market analysts wrote in a recent report that opposing market forces are operating on both sides of the dollar’s value. Thus, while asset markets remain upbeat about the currency’s prospects, risks are starting to emerge that could cut both ways. Even more important, President Trump’s statements on trade talks have turned into a key driver of dollar performance. His statements are often more than enough to move the needle on market sentiment.
Our baseline scenario shows that tariffs on Chinese imports could be reduced by as much as 60%. Such cuts would do serious damage to the dollar’s position in global markets. Nonetheless, uncertainty over the enforcement of these tariff reductions continues to eclipse a developing trend, leaving investors divided.
In addition, key economic data releases in the weeks ahead, especially on inflation, are sure to move the dollar one way or another. The U.S. economic calendar will be a very important part of the ingredients to put into the recipe to formulate goodwill and hope among investors for the greenback. Thus, analysts have become increasingly glued to these indicators as they seek to measure the impact these drivers can have on the dollar’s path.