Mnuchin, Draghi And USD

Will president Donald Trump’s comments about a stronger US dollar succeed in boosting the US currency? Do they even matter? Each time the media places considerable focus on US officials’ hinting at USD weakness, these very officials are given a subsequent opportunity to “clarify” themselves. I consider Trump’s remarks about US dollar strength to be more of his own long-term forecast for the currency resulting from his economic policies, rather than an intention to push up the dollar, which is not at all in his power to do.

Mnuchin Then Trump

Late Thursday in Davos, Trump said: “The dollar is going to get stronger and stronger, and ultimately, I want to see a strong dollar.” The comments were in contrast to Treasury Secretary Mnuchin’s remarks a day earlier about the positives of USD weakness and how he welcome it. The impact of Trump’s “clarification” of his Treasury Secretary was quite substantial as USD rose by about a full cent against most currencies…before retreating lower.

Trump has often talked both sides of the dollar in the past and will spin the benefits of strength/weakness of USD depending on the audience so none of it is a surprise. Yet, the market has recently piled into US dollar shorts and this was an excuse to head to the exits.

Will It Last?

Nothing has changed fundamentally because of Trump’s comments. There was never a grand conspiracy from the Treasury Department to weaken the dollar. We should not forget that Trump tends to confuse the strength of the US economy with its currency, which are often not in synch because the latter is a relative concept. Most importantly, a president embarking on a trade war will prefer a weaker currency. Period.

How About Draghi?

Most currency traders, including I, were reluctant to short EUR/USD on Thursday ahead of ECB president Draghi’s press conference. Draghi did attempt to rein in the euro’s rise but he faced a tough task especially as he had highlighted the broad nature of the Eurozone expansion, further backing the idea that the economy is transitioning from recovery to expansion. Draghi managed to weaken the euro slightly during the Q&A session when he expressed his lack of enthusiasm with Mnuchin’s remarks lauding the impact of weak USD on the pretext that G7 nations must not attempt to force down their currencies at the expense of an appreciation in other nations’ currencies.

All in all, my forecast for EUR/USD has not changed.

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