For months, we have obsessed over the strength of equity markets and the continuous daily record highs. However now the other side of the story is starting to gain traction, the decline of the US dollar. It’s becoming just as much a hallmark of the Trump presidency as the equity market rally.
The US dollar is yet again the major story of today’s trading session as yet again we have seen huge moves in the last 24 hours, with cable trading higher by almost 1.3% against the greenback. GBPUSD has jumped almost 2 big figures to trade above 1.4200, while EURUSD is testing its highest levels in 3 years at 1.2400. Gold prices are also jumping higher, trading at $1352 as the US dollar index continues its slide trading at 89.52. The lowest level for the index since December 2014.
It sounds fairly similar to yesterday’s trading session as the US dollar surges, but the cause is a little closer to home. This morning Treasury Secretary Steve Mnuchin stated that the weakness in the US dollar was a good thing for the US stating, “obviously a weaker dollar is good for us, as it relates to trade and opportunities”. Whether he believes it himself or whether he is spinning the decline for the White House is another story.
The government shutdown has obviously not helped the US dollar story, but it also cannot be put down as the root cause of the recent downside. In fact, the story since Trumps inauguration is not around Trump at all, it is more to do with the reserve currency status.
Central banks and governments have been recently diversifying their reserve currency, which means selling US dollars. With many diversifying into the Australian and Canadian dollar as well as the all-important Renminbi. Recently Germany, France and the ECB as a whole have moved millions of dollars to the Chinese currency. The question is whether it is diversification, or a dumping of the dollar as its weakness continues. The likelihood is that it's neither and more a speculative trade. Central Banks and governments have diversified their reserves as well as buying equities and corporate bonds.
So, the US dollar isn’t dead, two-thirds of the world's reserves are still in dollars, but it certainly has a problem with Trump. Who doesn’t!