Trump strong dollar snub meets silver lining bets on weakness
PRESIDENT Donald Trump likes a weaker dollar, and some corners of the market agree.
Though the greenback’s kneejerk reaction from Trump’s comments last Wednesday has all but been reversed, the US currency appears to be entrenched in a new range amid prospects of delayed policy from Washington and a slower pace of interest-rate hikes.
The Bloomberg Dollar Spot Index, slumping 4.5 per cent since its January high, headed toward its worst week in nearly a month.
For some traders this comes as welcome news. A lower dollar could lend support to sectors and asset classes battered by the 24 per cent gain over the past five years.
To be sure, many see the recent slump as only temporary thanks to a US economy that remains on solid ground. However, should the greenback face continued weakness, these assets could see a bid.
The US dollar still rules as the most important currency in the world’s markets, which has in recent history created an inverse relationship between gold and the greenback.
Declines in the dollar create demand for the safe haven, said Andrew Brenner, head of international fixed income for National Alliance Capital Markets.
While the Bloomberg Dollar Spot Index slumped 0.8 per cent in the holiday-shorted week, gold rose 2.3 per cent to trade at its highest since November.
Consumers might end up seeing a higher bill at the gas pump if Trump gets his wish for a weaker dollar.
“Typically, the US dollar and commodities move inversely, hence should President Trump’s comments have their desired effect, he will inadvertently be encouraging a rally in oil prices – ergo, gasoline prices – as well as other commodities,’’ Matt Smith, director of commodity research at ClipperData said in an interview.
Such gains extend to shale oil producers, which stand to benefit from the US’s increasingly large role as an exporter in the industry.
Of course, the impact might not be quite as large as years past.
“The oil market has such a surgical focus on OPEC production cuts that the movement in the US dollar is likely to have a lesser impact than it has in recent years,’’ Smith added.
The more that a company sells overseas, the more impact it can see from changes to currency valuations.
For example, Apple does a great deal of sales internationally, and has publicly lamented headwinds from a strong dollar.
“Since June of 2014, so we’re talking about 2.5 years ago, the dollar has strengthened 25 per cent against the basket of currencies where we do business,” Luca Maestri, Apple’s chief financial officer, said at a conference in February. “We always want to find the optimal balance between units, revenue, and margin, and it becomes more difficult as the dollar appreciates.”
To the benefit of manufacturers and US exporters, American goods would become cheaper and thus, more attractive for foreign buyers.
That means more gains for companies like Caterpillar, which gets more than half of its revenue from outside North America.
Credit markets also benefit from a weak dollar that stimulates foreign investments. As the largest holder of US Treasuries, Japan’s appetite could pick up should the yen strengthen against the dollar.
What’s more, a slump could mean higher profits and lower deflation risk, which in turn contracts corporate credit spreads, said Dennis Debusschere, Evercore ISI’s head of portfolio strategy.
“Assuming the US dollar weakness is not associated with increased US default risk or much weaker US economic growth, it also implies a Fed that is ‘behind the curve,’ reducing the odds of a recession or Fed mistake,” a positive development for corporate credit, said Debusschere.
Emerging markets are another beneficiary of Trump’s weak-dollar posture, with the offshore yuan jumping after the comments.
The president’s expression of support for low interest rates also buoyed the currency.
A stable greenback would help China’s central bank keep the yuan stable, protect the economy from looming capital outflows, and, as such, boost market sentiment toward emerging markets.
The stability of the dollar this year has fueled carry trades in emerging markets and eased concern about the debt-servicing capacity of companies across Latin America, Asia and Eastern Europe, which have loaded up on dollar debts in recent years.