Greenback Remains Firm Ahead Of Jobs, JGBs Stabilize, Italian Debt Moves Into Spotlight

With the US threatening to escalate the trade conflict with China, many observers are trying to link it to the dollar's strength. Trade wars are not only easy to win, as President Trump has declared, but it is also good for the dollar, we are told. But is it really? 

If it is a safe haven, then gold ought to be firmer, but it is sitting at its lowest level in a year.  The S&P 500 posted on the bullish outside up day yesterday, closing at a five-day high and poised to challenge the record high. It is true that emerging market equities are under pressure, after trending higher in July. The MSCI Emerging Markets Index has retraced 61.8% of last month's bounce that peaked on July 26.

This is also ad hocery. It seems that a different narrative is constructed to explain every wiggle in the foreign exchange market, where, in the name of efficiency, the largest pair, the euro-dollar exchange rate is often traded in thousandths of a penny. The difference between JPY111.00 and JPY111.01 is about 100,000th of a cent. 

Exactly, why US-inspired trade tensions would be good for the dollar is not exactly explained. Alternatively, consider what has happened over the past week. The ECB affirmed no intention on hiking rates for a year. The BOE hiked rates but said a hike a year is just about the right pace.  Japan tweaked its programs not to taper them, which is a way to gradually bring the program to an end, but to extended them indefinitely by trying to minimize the undesirable side effects.

In the US, high-level discussions are underway within the Republican Party for a second round of tax cuts, which would include making the middle-class tax cuts permanent. Other reports indicate that the White House is exploring some relief it can give with executive authority to compensate some farmers for the cost of the retaliatory tariffs, the White House resurrected a New Deal program to offer $12 bln of assistance. The larger than expected deficit has not deterred the government from looking at measures that will expand it further.  Investors have good reason to expect that the policy mix, which drove the greenback higher under Reagan and Volcker, and lifted the Deutschmark higher after the Berlin Wall fell, is again in place in a significant way in the US.

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Read more by Marc on his site Marc to Market.

Disclaimer: Opinions expressed are solely of the author’s, based on current ...

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