Dollar Falls As Inflation Risk Recedes

When the Fed announced that they would be raising interest rates the dollar soared. However, the actions of the Fed are data driven and the data does not indicate a huge surge of inflation and thus the data does not indicate a very rapid rising of interest rates. Bloomberg writes about the dollar’s recent fall as a reaction to an inflation miss.

The dollar declined to the lowest level in five months versus the yen, also crossing the 200-day moving average, after U.S. inflation unexpectedly fell in March for the first time since February 2016, raising doubts about the global reflation trade and the prospect of accelerated Federal Reserve interest-rate hikes. What’s more, the so-called core consumer-price index, which excludes volatile food and energy prices, fell for the first time since 2010.

The fallout from a falling dollar includes hurting the carry trade, improving US manufacturing sales offshore and delaying the increase of US debt payments.

When uncertainty roils the currency market money moves into safe haven currencies. Unfortunately safe haven currencies like the yen and Swiss franc have very low interest rates. Thus there is the temptation to sell francs and yen and buy currencies where interest rates are higher. Depending on the precise circumstances the most popular carry trade varies from year to year. Most recently Taiwan ranked high in this regard.

Lower inflation and lower interest rates also take a bit of pressure off the Yuan and reduce the risk of a trade war.

Chinese industrial growth has been spectacular for decades. And the Chinese economic growth miracle is coming to an end. As Forex traders we are interested in the new Chinese normal and the yuan. Will money poured into infrastructure and a push toward higher quality products save China from a hard landing? How will the new Chinese normal and the yuan work out?

Lower growth targets are simply a reality as Chinese industrial production and imports suffer. The Guardian reports as China lowers growth target to 7%.

The fact of the matter is that China is probably fudging its growth figures and will probably see growth similar to Europe and North America by the next decade.

Lower inflation in the USA and a very slow rising of interest rates will help Trump avoid tagging China as a currency manipulator.

A top outside adviser to President Donald Trump said the U.S. probably won’t name China a currency manipulator in a report due this month, a move that would break a key campaign promise and another sign of capitulation on the administration’s tough trade talk.

The Treasury is expected to release its first currency report under Trump this month. The department is required by law to report to Congress twice a year on whether America’s major trading partners are gaming their currencies.

While candidate Trump complained about Chinese currency manipulation he was in fact a decade out of date. Now he needs China to help rein in North Korea and China is fighting to raise the value of its currency. Meanwhile the USA is drifting away from inflation.