Timothy Fox - Head of Research & Chief Economist
Mohammed Al Tajir - Manager, FX Analytics and Product Development
Published Date: 02 April 2017
Although the dollar firmed up on Friday it ended Q1 3.3% softer against a basket of currencies (DXY index) amid growing concerns about President Trump’s ability to implement key planks of his policy agenda including tax cuts, increased spending, and deregulation. Treasury bond yields have retreated back to the lows seen at the start of the year and the USD has struggled after rallying strongly at the turn of the year, especially ahead of Donald Trump’s inauguration. Q2 looks likely to be a nervous quarter for financial markets, including the dollar, as markets weigh the likelihood of legislation getting bogged down for longer in Congress, especially after Trump failed in his bid to repeal President Obama’s flagship health care reforms.
For the time being the messages from the Federal Reserve still appear to be consistent with at least two more rate hikes this year with most policymakers having indicated the Fed has met its goals, and nearly all supporting a scenario for three or four hikes in total. Confidence remains high heading into April, as reflected in recent sentiment surveys, the labor market continues to strengthen, and manufacturing is improving further. Should such expectations begin to get dampened by softer economic data, however, then the dollar is at risk of falling again. Indeed after starting Friday positively in the wake of upgraded US Q4 GDP data (to 2.1% from 1.9%), the dollar later fell back as news reports circulated that the Trump administration is assessing ways to penalize currency manipulators.
Source: Bloomberg, Emirates NBD Research