The US dollar experienced some weakness at the beginning of the week. It seems that investors are cautiously optimistic about upcoming trade talks between the US and China but feel that there may be a long road ahead. While the talks later this week are generally seen as a positive development, there is a sense that there may not be enough immediate progress to bring about a change to the current impasse. The dollar fell 0.4% against the euro and 0.2% versus the British pound. The WSJ Dollar Index showed that the dollar fell 0.2% to 89.84 against a basket of 16 currencies.
Change on the horizon
There is a general sense that there is a change coming for the US dollar after a period of prolonged strength. There is still the opportunity to end the US-China trade war but that isn’t the only issue weighing on the greenback. The President has stated that a second government shut down is unlikely, but has voiced his displeasure and the proposal from Congress. They have conceded some ground to Mr Trump, offering $1.375bn in funding for 55 miles (88km) of new fencing at the border. However, this is a small fraction of both the $5.7billion he requested and the promised concrete wall stretching for 2,000 miles. Lawmakers on both sides of the political divide appear keen to avoid a shutdown, but the issue of the wall continues to trouble both the president and the US dollar as no compromise is reached. This latest development, together with the US-China trade talks do suggest that perhaps the current situation will not last forever and the US dollar is well placed to regain its prior strength.
Pound continues to struggle due to Brexit uncertainty
British Prime Minister Theresa May addressed parliament over the latest on the Brexit deal yesterday, but there was no new detail. MPs appeared frustrated by the lack of progress and the pound paid the price. Sterling fell in the run-up to the statement and fluctuated as the discussion in parliament highlighted the clear divide which suggested that officials are no closer to an agreement on how to proceed with the UK’s departure from the EU. Theresa May repeatedly reminded parliament that the only sure-fire way to avoid crashing out of the EU without a deal was to vote for one. Talks are still ongoing, but officials are running out of time with less than 50 days to go before departure. In the meantime, sterling remains in a precarious position with no good news or certainty to provide assistance.
Economic slowdown across Europe reflected in euro
The US dollar and the British pound weren’t alone in their struggles yesterday. Investors are flocking to safe haven currencies including the Japanese yen and the Swiss franc. The euro, previously considered a safe haven, is losing some of is shine as an economic slowdown across the Eurozone starts to bite, although it did recover some of its losses against the yen later in the session. There is an expectation that the European Central Bank may announce a change in focus for their policy as early as next month. This is likely to take the form of an adjustment to the forward guidance provided, with further changes following by the summer.