The ongoing strength of the US dollar was sometimes counterintuitive. The market appeared to largely ignore economic performance and political turmoil, focusing more on the US-China trade war, which dragged on despite multiple promises for a resolution. The actions of the US Federal Reserve were also in the spotlight.
Uncertainty in the USA
In 2019, the American economy appeared to lose some of its sparkle. In general, the market appeared unperturbed by the numbers and the US dollar was not unduly influenced by the monthly or quarterly results, perhaps because the picture was often mixed. For example, at the beginning of the year, increases in industrial production were accompanied by a decrease in consumer confidence and improved PMI scores went hand-in-hand with a decrease in home sales, so the numbers effectively cancelled each other out. As the year progressed, missed forecasts for everything from production to employment meant growing concerns about the future direction of the economy. In May, the National Association for Business Economics reported that a consensus among economists put a 60% chance on a US recession before the end of next year. In general, the market remained mostly unmoved due to a focus on the actions of the Fed and the progress – and increasingly apparent impact – of trade tensions with China.
Trade war tensions turn up the heat
While many ecostats were shrugged off by the market, January’s balance of trade figures did have an impact on the US dollar. The deficit shrank by 15%, largely due to panic-buying at the end of 2018 to beat tariffs. The repeated promises and dashed hopes of a deal with China throughout the year put pressure on the currency at various points through the year. There were signs that US companies were beginning to feel the pinch due to falling export sales and increased import costs to and from China. Promises in April that a deal was imminent gave the US dollar a boost, but when the deal didn’t materialise, the US dollar was unable to sustain the gains. In June, threats of additional tariffs on Mexico had little impact on the US dollar but did see a fall in US share prices; in the long term, investors see tariffs exerting an upward pressure on inflation and interest rates, and potentially downward pressure on the US economy. By the end of the summer, investors wearied of the trade narrative and were mostly split between those who felt that the US dollar had risen as much as it could and those that believed there were further gains to be made. A failed truce with China and an attack on Europe and China from the President alleging currency manipulation served to push the greenback lower. Although the US dollar is ranked among the safe-haven currencies, its reactions in the trade war scenario are less predictable, not least because of its effect on the domestic economy. In December, the US President announced the reintroduction of tariffs on steel and aluminium from Brazil and Argentina and intimated that there may not be a China trade deal until 2021. Both proved unsettling developments for the dollar in a year when investors had been optimistic about a resolution and instead saw further escalation in the trade war with China and beyond.
Federal Open Market Committee in the spotlight
Convention dictates that the US President should refrain from commenting on the actions of the Fed, but President Trump proved himself unconventional for another year with repeated criticisms of its actions, or what he saw as a failure to act. The ongoing calls from the Fed for patience throughout the year appeared to go unheeded as the market also reacted to the developments. The Fed repeatedly demonstrated patience in the first half of the year and by July the dollar’s fate became tied to speculation that a cut might be imminent, with dashed hopes sending it briefly lower against its rivals. A cut of 25 basis points in September to between 1.75% and 2% was expected, even if it disappointed those hoping for a larger cut, and the dollar made tentative gains. A second cut in November by a further 25 basis points didn’t have the same effect – the hawkish tone of the accompanying statement pushed the dollar lower against a basket of currencies. Fed Chairman Jerome Powell stated in Congressional committees that there were no further cuts in the pipeline but that there was no pre-set course for the Fed’s plans, which would remain data dependant, regardless of market expectations and criticisms.
US dollar attempts to shrug off political turmoil
It was a dramatic year on the political front and while the markets tried to ignore the developments for the most part, some aspects did have an influence on the US dollar. The government shutdown at the beginning of the year didn’t appear to impact the greenback directly, but it did delay economic statistics and indicate the tension between the President and the House of Congress. Impeachment proceedings begun in October were largely ignored by the market until the vote came through in December. The Democrat-held Congress voted to impeach, causing a small fluctuation in the US dollar but the move was largely expected, as is the acquittal of the President during a trial held at the Republican-held Senate in the New Year. It will set the tone for another year of political drama which could impact the US dollar in 2020, particularly in the run-up to the presidential election in November.