NEW YORK (Reuters) – US President Donald Trump may not be happy about the strength of the US dollar, but the recent rally in the greenback may be partly a product he made himself.
FILE PHOTO: On January 15, 2018, banknote banknotes of the US dollar are displayed in a bureau de change shop in Ciudad Juarez, Mexico. REUTERS / Jose Luis Gonzalez / File Photo
The US dollar has risen against the major currencies for several months, with the dollar index up nearly 7.0 percent in the last three months and a high on Thursday.
The dollar has gained strength since the end of 201
The Fed raised interest rates twice this year and is expected to raise rates a few more times by the end of the year, which could ease more foreign investors into the US dollar, while keeping monetary policy loose in Europe and Japan.
In a break with the usual practice of US presidents, Trump has spoken unusually loudly about the dollar and publicly publicly criticized his strength, though analysts question whether his frequent rhetoric will have lasting influence.
In a CNBC television interview on Thursday and Friday, Trump said he was worried about the potential impact of a stronger dollar on American exports.
He also broke the convention by criticizing the Federal Reserve's rate hike policy, stating that this deprives the United States of America's "great competitive advantage."
TRUMPS TRADE AND TRADE POLICY SUPPORTS US DOLLARS
However, investors and traders attribute some of the gains to the Trump government's tax cuts, which increase the budget deficit, lead to more government borrowing and the introduction of import duties against China, Europe , Mexico and Canada, which can contribute to inflation.
"With tight monetary policy and loose fiscal policies, Trump has created nearly perfect conditions for a rally of the dollar," said Karl Schamotta, a strategist at Cambridge Global Payments in Toronto.
"This is pulling dollars into the United States and increasing the uptake of capital within the US economy, which will boost the dollar in and for itself."
The tax cut approved by Congress last December $ 1.5 trillion and the $ 1.3 trillion spending plan imposed in March have raised budget deficit forecasts.
As a result, the US government debt burden in 2020 could be the highest since World War II, according to the Congressional Budget Office in June.
While the Federal Reserve is raising short-term interest rates in the face of consumer price inflation of 2.9 per cent per annum in June, longer-term bond yields may rise to attract foreign capital to finance the further budget deficit and keep the US dollar strong.
"The Fed is responding to the information provided: Stronger fiscal stimulus should imply stronger growth," said Mazen Issa, senior FX strategist for TD Securities in New York. "This could lead to additional inflation and narrower labor markets, so in order to keep inflation in check, they may need to raise interest rates."
"To change that, the Fed needs to curb its tighter monetary policy or tighten Europe, Japan and I do not see either, "said Stephen Massocca, senior vice president, Wedbush Securities, San Francisco.
But analysts also attribute the strength of the dollar to escalating tensions over trade policy between the United States and many of its major trading partners. Investors are betting that the dollar will benefit at the expense of emerging market currencies, which are dependent on commodities exports.
Companies in the US and other countries may be less competitive as import tariffs contribute to rising input costs, higher consumer prices, and lower demand for emerging market commodities.
Trump said in a CNBC interview on Friday he was ready to impose tariffs on all $ 500 billion of imported goods from China, potentially further escalating a trade dispute.
"Much of what he wants and what is actually implemented is inconsistent," said Mazen Issa, senior FX strategist for TD Securities in New York. They do not eat or eat your cake. "
Even if the dollar reacts to Trump's words in the short term, analysts believe the impact is limited and they do not expect that this changes.
"I only see that as a short-term consequence," said Issa.
The impact on the dollar could be a little more sustainable if Trump makes it a point to repeatedly attack the strength of the dollar.
"If it becomes a more constant drum beat, it's probably something that will put a heavier burden on the dollar," said Shaun Osborne, chief FX strategist at Scotia Capital in Toronto.
Trump's comments on the greenback were also ironic, accusing the European Union and China of their strong words to manipulate their respective currencies.
"It's like, pot, hit the cauldron," said Schamotta.
GRAPHIC: President Trump on the US dollar reut.rs/2L7SYtE
Saqib report Iqbal Ahmed and James Thorne; Additional reporting by Stephen Culp; Edited by Megan Davies and Clive McKeef