The US dollar is ‘too strong’ — Trump
The US dollar is “too strong” according to newly installed President Trump. In an interview with the Wall Street Journal, President Trump said China is holding down the yuan. “Our companies can’t compete with them now because our currency is too strong. And it’s killing us.”
Trump’s statements sent the US dollar index (symbol DXY) tumbling to a sevenweek low of 100.69 last week. Investors took Trump’s statements to mean the US may be backing off its long-standing mantra of a “strong dollar” policy. The DXY is a leading benchmark for the international value of the US dollar. It measures the value of the US dollar against a basket of top foreign currencies. Rhetoric vs. actual policies
Donald Trump’s comments are pretty much at odds with his own policy statements. On one hand, Trump says the dollar is already “too strong,” implying he wants the dollar lower. But on the other hand, his economic policies of fiscal stimulus, infrastructure spending, corporate dollar repatriation and other reflationary measures are structurally bullish for the dollar. Trump has also been saying he wants the Fed to let interest rates rise, saying the Fed had kept rates artificially low for such a long time. This is also dollar bullish. Long-term dollar strength vs. short-term
Treasury Secretary nominee Steven Mnuchin, however, was quick to clarify that President Trump’s comments were not meant as a long-term policy. Mnuchin, when asked at his confirmation hearing before the Senate finance committee last week, said “the dollar’s long-term strength – over long periods of time – is important.”
He said when Trump made a comment on the US dollar, it wasn’t meant to be a long-term comment. It was meant to be that perhaps in the short term, the strength in the currency, as a result of free markets and people wanting to invest here, may have had some negative impacts on our ability to trade.” Markets are quick to react and discount
Trump’s reflationary policies were seen as structurally bullish for the US dollar (see Dollar strength reaccelerates after Trump win, Dec. 5, 2016). But the market may have priced in this information already. Hence, the pullback in the US dollar prior to Trump’s inauguration may, in fact, be case of a “sell on news” event. Note that the market and politics operate on different timetables. While the market has quickly discounted the news, it may take a much longer time before politicians actually enact the policies the Trump administration has laid out. Major currencies making short-term headway against the dollar
Markets rarely move in straight lines. Certainly, after an 11 percent run since May of 2016 the DXY (shown below) is bound to give back some of the gains. It has retraced three percent since reaching a 14-year high of 103.82 last month. The 100 level for the DXY - previously a major resistance, but now turned into major support - is crucial. A breakdown below this level would mean a much longer consolidation for the DXY. However, if it continues to hold above 100 and rallies back up, the chart formation remains bullish.