US President Donald Trump came into office blustering mighty fine with aggressive trade rhetoric. This short term approach is killing the long term economic credibility of the United States. The Federal Reserve (Fed) is responsibly setting monetary policy to address these issues in today’s climate. At the same time, the US Dollar Index (DXY) languishes near four month-lows. As of this writing, the DXY index is trading around 96.97. This figure depicts a long-term weakness of the Greenback against a basket of six global leading currencies.
In the US, we saw a big rise in November Durable Goods Orders, which jumped 5.3%. Orders other than defense jumped 6.6%. Orders for non-defense capital goods excluding aircraft surged by 0.7%. Durable goods orders excluding transportation increased 0.5%, showing a strong manufacturing sector ahead of potential economic headwinds.
Fed’s Policy and Economic Indicators
The Federal Reserve is widely expected to hold interest rates steady at its next policy meeting, now just days away. This decision comes despite mixed economic signals. Although inflationary pressure has decreased to less than 2%, pressures on the unemployment rate are increasingly making federal policymakers reassess the current state of monetary policy. Analysts suggest that should inflation continue to decrease or unemployment rates rise significantly, the Fed may consider lowering interest rates to stimulate economic growth.
The last week’s economic data creates a very mixed bag for the Fed to contend with. Even though durable goods orders show that manufacturing is strong, fears remain about the broader economy. The current political climate poses great dangers. President Trump’s trade strategies would harm not just future economic performance, but confidence in US monetary policy.
Political Uncertainty and Market Reactions
Resurfacing fears of a US government shutdown add to the downward pressure on an already tenuous economic landscape. With Senate Democrats having already signaled their intent to block one of the biggest individual funding bills, the storm has only intensified as the January 30 deadline draws near. The disarray and uncertainty about government funding is likely to be an additional source of damage, further sapping economic confidence and increasing financial-market volatility.
The market’s reaction reflects these growing concerns. Today, the EUR/USD currency pair is trading at around 1.1886. That value leaves it just below the highest value observed since September 17. The Euro is gaining against the American Dollar. This change is a reflection of how rapidly international investors are responding to the increasingly toxic political and economic environment in the US.
The New York Fed made exactly such a move last week, providing a “rate check” for USD/JPY on behalf of US Treasury. This latest deployment highlights their continued attempts to tread water while trying to control currency depreciation amidst external shocks. The great Yen snapback, whatever its merits, has certainly exacerbated the Dollar’s malaise. This development adds even more uncertainty into the equation for the US currency.