Dollar Bulls Retreat Before Trump Policy Speech

March 1, 2017

Dollar price action today shows the currency being unloaded by market participants, as comments from recently-inaugurated US President Donald Trump eclipse fundamental data. The effects of Trump’s rhetoric may be dwindling however, considering the performance of the dollar index in recent sessions. The newly-minted President’s chief concern is trade competitiveness for the greenback. However, if the upcoming policy speech set to be delivered overnight is devoid of substance, he may find himself regretting that he was not more careful with his wishes.


Politics Overshadow Fundamentals

Despite a hazy outlook on the schedule for US rate hikes and ongoing uncertainty in Europe, the losses in the dollar index during December and January have reversed to form an admirable comeback. The climb upwards also flies in the face of the data dependent US Federal Reserve, instead riding in the wake of promises from President Trump for new spending and tax reforms. His comments are largely positive for inflation, pushing the dollar along with market hopes that resulting inflation will lead to additional rate hikes from the Fed.

Nevertheless, the likelihood of a quickened rate hike schedule is dampened by a few key pieces of fundamental data. One such report may be the second revision to fourth quarter US GDP that was released before the US equity session on Tuesday which illustrated the US economy failing to top the 1.90% annualized growth that was previously reported during the advance GDP reading. Another event likely to derail additional rate hikes may be the slowing pace of economic activity during first quarter of 2017, which already suffers from a poor outlook due to the recent trade balance figures. At its lowest point since 2008, a deficit of $69.2 billion exemplifies the destructive results of a strong dollar when it comes to falling exports and rising imports.

Aside from fundamentally driven fallout, success or failure on President Trump’s part will also move the needle on the rate hike gauge. Should he fail to push his spending and tax reforms through an already hesitant Congress, additional bumps may form in the road. For the dollar, this may mean that Trump gets his wish of a more competitive currency. Should inflationary measures not be implemented, the Federal Reserve may prefer to hold off on tightening policy further in the form of rate hikes, giving the dollar pause for caution. However, on the flip side of the equation, traction on the policy front and support from Congress may herald numerous changes over the coming months and years that prove supportive of the US dollar’s global reserve currency status.

Pressure to Endure During Policy Speech

The dollar index has slipped throughout Tuesday’s session, but weak data from the US is responsible for only part of the declines. Also answerable for the day’s price action are investors, who are trying to keep the boat from rocking ahead of Donald Trump’s upcoming policy speech. Though volatility will increase during the event, pressure is likely to persist throughout the Asian session. The real determinant of the reaction however will be in the details presented throughout the speech.

The substance of his speech is extremely important, especially with some expecting Trump to take advantage of his address to frayed reset relations with the legislative branch. To date, Trump’s policy proposals have been broad strokes at very best, and investors picking a direction for the dollar will be watching intently for any policy specifics that translate to greater insight into the economic outlook. Nevertheless, when it comes to Trump, anything and everything is possible, keeping the dollar perpetually off balance.