Cloud covered

The blue skies over the global economy of the past year or so are starting to cloud over due to increasing political risk, mainly protectionism related issues. Tariff threats from the United States might prove to be bluster, but demands for a level playing field are still likely to imply a bias for dollar weakness from the U.S. administration. The market has begun the process of weakening the dollar in the past year, and analysts share the view that there’s much further to go. Market watchers pencilled 1.45 for euro/dollar rate over the next two years and 90 for dollar/yen. On the other hand, bond yields should continue to edge higher – led by treasuries as the US Federal Reserve maintains its once-perquarter rate hike schedule through to the middle of 2019 at least. Also, the bull run in equity markets are over, while all significant stock markets underwent a punishing, but much-needed, correction in the first quarter. Some recovery seems possible in the near term if tariff-related issues prove mere bluster – but the longer-term outlook is still mixed for all. Last week’s story was increasing volatility in emerging market currencies, as well as a sharp slide in the Russian rouble and Turkish lira as well. But one thing is clear: When the policymaking by tweet (particularly from the US President Trump) dominates the financial markets in seconds and rattles all the guidance of central banks, the rate differentials won’t matter, and trading conditions in foreign exchange markets will remain tough for the foreseeable future.