All hail King Dollar!
Morning mid-market rates – The majors
August 13th: Highlights
- Trump continues to use trade as a weapon
- Brexit fears continue to drive Sterling lower
- Euro falls on fears over banks Turkish exposure
Dollar index at 13-month high
Trump has shown himself willing to provoke China by adding tariffs to a wide range of goods exported to the U.S by China, gambling on his belief that, in trade at least, China needs the U.S rather than vice versa. The jury is still out on that tactic.
There is a growing dispute with fellow NATO member Turkey over several issues the most pressing of which is the trial of an American Pastor charged with terrorism offences which he strongly denies. President Trump has doubled tariffs that were put in place in March on Turkish exports of metals into the U.S.
The original tariffs were a catalyst for a fall in several emerging market currencies. These latest tariffs threaten to cripple the Turkish economy as the currency has fallen by 40% in less than a month. The increased tariffs may be against WTO rules, but Turkey doesn’t have time to wait to find out.
The dollar rallied as emerging market currencies fell and the dollar index which measures the dollar’s performance versus major currencies rallied to a 13-month high of 96.45 before settling back a little to 96.32.
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Sterling crumbles despite no fresh Brexit factors
President Trump changes direction over the dollar regularly, and his rhetoric over the weekend in which he said the “mighty dollar” was crushing the Turkish Lira could be as short-lived as his view on the success of his new relationship with North Korea. A correction for Sterling based purely on a reversal of dollar strength is eminently possible.
There is little doubt that a no deal Brexit, like an ill-wind, will do nobody any good and while the comments regarding the effect of a no-deal on the economy from BoE Governor Mark Carney should be taken seriously, he doesn’t, yet, see that as his base case.
As far as Brexiteer heavyweight UK Trade Minister Dr Liam Fox’s comments about a 60/40 chance of a hard Brexit are concerned, the lack of follow up they have received from fellow Brexiteers puts them in the box marked propaganda. There is far more likely to be an extension to the March 29 deadline than a no deal goodbye on that date.
The UK Parliament returns on September 4th and one of Theresa May’s first jobs will be to “steady the ship”. While she may not be believed, at least the other side of the no deal argument will have been put to rest.
There is a lot of discussion still to take place between London and Brussels before the outcome. Both sides posture and threaten but neither wants a hard Brexit to become a reality and there is still plenty of time for the pound to also recover a little poise.
Euro falls as bank’s Turkish exposure raises concerns
The euro has now fallen by 8.5% versus the dollar this year which must be ringing inflationary alarm bells at the Bundesbank if not at the ECB. ECB President Mario Draghi maintains his stoic acceptance of a weaker currency but if the pace of its fall this year accelerates then monetary policy will need to be reviewed.
The reason for the latest fall in the euro is rooted in the growing crisis in Turkey. There are concerns over Eurozone financial institutions exposure to Turkey, particularly Spanish, Italian and French banks.
Contagion is a word that hasn’t been used since the financial crisis but if the Turkish crisis spreads, Eurozone debt could be abandoned in favour of the U.S. with a consequent effect on the euro.
1.1000 remains the long-term target for the common currency versus the dollar and that level could be a line in the sand for the ECB who may be forced into action at least verbally at first.
Have a great day!
About Alan Hill
Alan has been involved in the FX market for more than 25 years and brings a wealth of experience to his content. His knowledge has been gained while trading through some of the most volatile periods of recent history. His commentary relies on an understanding of past events and how they will affect future market performance.”