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The U.S. Dollar Gets an Injection of Political Risk
The U.S. Dollar Gets an Injection of Political Risk
-- Not sure serious analysis is possible’ at this point: Juckes
-- Fiscal outlook obscured with focus on migration, trade curbs
Currency traders have long been used to analyzing political risk -- just not so much when it comes to the U.S. dollar.
The greenback has been rattled this week by political concerns, spurring debate over the long-term implications of Trump administration policies and their impact on demand for assets denominated in the world’s reserve currency. It’s a relatively unfamiliar dynamic for those accustomed to looking at bond-yield differentials when attempting to gauge the dollar’s outlook.
“I’m not sure serious analysis is possible, and I don’t trust my gut instincts on something as far from the usual state of affairs,” said Kit Juckes, a global strategist at Societe Generale SA in London and a veteran of more than three decades of market research. Juckes was referring, in a note Tuesday, to the dollar’s reaction to President Donald Trump’s selective travel ban.
While the dollar index is still higher than before the Nov. 8 election, it’s the foremost example of a “Trump trade’’ running out of steam in recent weeks. The S&P 500 Index of stocks remains near a record following an initial surge of optimism over Trump’s economic reflation program, and U.S. Treasuries are little changed over the same period.
The big question for traders now is to what extent political risk will drive the dollar’s prospects, given the specter of a rising sovereign risk premium and protectionist policies that may test the appetite of official-sector investors to finance the U.S. deficit.
Watch the Flows
Among gauges to monitor: the U.S. Treasury’s monthly report on international demand for U.S. assets, with the next one due Feb. 15, for December. The Federal Reserve reports weekly on its custodial holdings of Treasuries for foreign official and international accounts. Over a much longer time frame, the International Monetary Fund’s quarterly data on reserve assets would show any shifts in the dollar’s dominance.
To continue reading please click link https://www.bloomberg.com/politics/articles/2017-02-01/the-world-s-base-currency-gets-an-injection-of-political-risk