Dollar slides to 6-month lows
Dollar slides to 6-month lows, politics and economics damage confidence
Concerns surrounding the US political and economic outlook have combined to trigger fresh dollar selling this week.
The US currency has come under sustained pressure with the dollar index retreating to six-month lows below the 98.0 level. EUR/USD has also strengthened to 6-month highs around 1.1100. The US currency has also now lost all the gains seen following President Trump’s unexpected victory in November’s election with the trade-weighted index declining from highs above 103.0 late in 2016.
Concerns President Trump’s actions and wider US political considerations have had a significant impact in undermining the US currency.
Trump was initially damaged by his decision last week to fire FBI Director Comey with accusations that the decision had been taken to undermine the FBI investigation into Russian involvement in the 2016 election. There was further controversy over an alleged disclosure of secret intelligence material to Russia without the permission of the original source.
Tensions increased further on Wednesday with media reports of a leaked memo written by former FBI Director Comey that Trump had asked the investigation into former National Security Advisor Flynn to be stopped. The net result was a sense of chaos and crisis surrounding the US Administration. From a market perspective, the most important factor is concern that the planned agenda of fiscal reforms and tax cuts will be damaged, especially given the deterioration in relations with Congress.
The bullish dollar case had been built to an important extent on expectations of tax cuts and stronger GDP growth. With less confidence over tax cuts, the dollar has come under pressure. Politically, there has also been increased speculation that Trump will not serve a full 4-year term with concerns over political instability undermining confidence in the US outlook.
There have also been increased doubts surrounding the US economic outlook following recent economic data. The retail sales data was generally lacklustre for April and the latest housing starts data was also below market expectations.
Although business and consumer confidence remains close to record highs, this does not appear to have been translated into stronger economic activity, although the overall evidence is still mixed.
The April inflation data was weaker than expected with the core annual increase declining to 1.9% from 2.0%. In response to the weaker data and lower inflation, there has been reduced confidence in a series of further interest rate increases by the Federal Reserve.
According to futures markets, the chances of a rate increase at the June FOMC meeting have dipped to near 70% from 90% last week. The chances of one rate increase or less over the remainder of 2017 is also now seen at over 50%.
Reduced confidence in the economic outlook has also sapped dollar support, especially with greater confidence in the Euro-zone outlook following Macron’s victory in the French Presidential election.
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