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Much Ado in Forex Markets About A Weak vs A Strong U.S. Dollar

U.S President Donald Trump has made it very clear since assuming office that he believes that a weak Dollar (USD) is good for the economic prospects of the United States. In the days leading up to his inauguration in January 2017, Trump categorically noted that the U.S. dollar is too strong in the forex market and “our companies can’t compete with [China] now because our currency is too strong. And it’s killing us.”

Economic policies from Washington in the following months have erased all doubts about the fact that Trump and his advisers think a weak dollar is better for the U.S. economy. Last month, U.S. Treasury Secretary Steven Mnuchin espoused the virtues of a weak dollar when he said that “obviously a weaker dollar is good for us as it relates to trade and opportunities,” he also went ahead to state that the short-term value of the USD “is not a concern of ours at all.”

 

The world is antsy about Washington’s desire for a weak dollar

Trump’s body language on the value of the USD in forex markets and the statements of the Treasury secretary, however, trigger jitters that rippled through the U.S economy and its relationship with its trade partners; in fact, the U.S. dollar dropped 0.47% against the Euro after Mnuchin’s statement.

Mnuchin’s statements also caught economists by surprise, Stavros Lambouris, CEO of HYCM Europe observes that “U.S. Treasury secretaries are traditionally known for speaking in favor of a strong dollar, but Washington seems to be hellbent on undermining the status of the USD as a global reserve currency.”

In fact, Trump, despite his usual disregard of public opinion has gone out of his way to provide ‘clarity’ on Mnuchin’s words and the positioning of Washington on how the greenback trades in the forex markets. While speaking with CNBC on the sidelines of WEF in Davos, Trump noted that “the dollar is going to get stronger and stronger, and ultimately I want to see a strong dollar.”

Here are 3 reasons the U.S. is weakening in the forex markets

The U.S. dollar has mostly been on a decline since 2017 but the realities of a weak dollar recently become more pronounced after Steve Mnucnhin’s remarks.  In the last one year, the EUR has climbed against the USD from 1.05871 to 1.23257. Below are three reasons the U.S. dollar will continue to trade lower than peers in the currency markets going forward until Washington makes a concerted effort to support a stronger dollar.

  • U.S. protectionist economic stance

The first reason for the weak dollar is the increasingly vocal U.S. protectionist stance. Washington is adopting an America-first policy that is making global trade partners uncomfortable. China has warned the U.S. to be careful not to trigger a trade war and ECB is worried that the continued talking-down of the dollar is having an adverse effect on International trade. China, however, believes that a strong Yuan will help cement its position as a global reserve currency. Hence, it is taking every weakness in the USD has an opportunity to float a stronger Yuan.

  •  Strengthening foreign economies

The second reason the USD seems to be getting weaker in the forex markets is that foreign economies are becoming stronger – by implication, the currencies of such countries are commanding a higher value in the forex markets. For instance, the ECB is leaning towards an upward review of its monetary policy as much of the uncertainty surrounding the Euro in the global forex market starts to ease out.

  • U.S. stocks are about to enter a bear cycle

Much Ado in Forex...

The third reason the USD might remain depressed against other currencies in the global forex market is that analysts are worried that U.S equities are on the eve of a bear market. The U.S. bull and bear market cycles tend to follow a 7-year pattern and U.S. equities have been enjoying 7 years of bullishness after the market found its way out of the last global economic recession. The market has had more than 7 years of a bullish cycle and analysts believe that we are on the eve of a bear cycle.

 

 

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Victor Alagbe is a seasoned business and finance writer with a specialty in writing about how to invest for the long-term in healthcare, pharmacology, energy and tech stocks. His long-term focus is on stocks that provide a nice mix of growth and income. For the short term, he passionately writes about trading stock options for the excitement and leverage that stock options offer.