USD: Uptrend intact, awaiting fact - ANZ

Brian Martin, Head of Global Economics at ANZ, suggests that the anticipated US policy mix under President-elect Trump has proved very positive for the dollar even if details on the future fiscal stimulus are scant.

Key Quotes

“The dollar’s appreciating trend has intensified as the anticipated policy dynamics of an expansionary fiscal stance and higher interest rates under a Trump presidency have proved to be a powerful dynamic for the currency. DXY is now at its strongest level since Q1 2003 and market expectations are growing that the dollar may rise materially further over the medium term as fiscal expansion is overlaid on an economy operating at or very close to full employment. The sharp rise in bond yields has also assisted dollar strength.”

“European politics comes to the fore

For now though, the expectation that an expansionary fiscal policy will come when the economy is operating at full employment should continue to lend support to the USD. Barring some shock, the FOMC should announce a 25bps rate rise in the fed funds target on 14 December whilst the ECB is expected to extend its QE program when it meets on 8 December. There is also the potential for a rise in uncertainty should the referendum in Italy fail on 4 December, not to mention elections in the Netherlands, France, and Germany next year. 

The European dimension is an important element in our expectation of further dollar gains in the coming months and that could deteriorate further. Would an additional 5-10% political risk premium be required if the European political environment deteriorates in the near term? Probably, but as opinion polls have shown this year, forecasting political outturns is very difficult. With that in mind and given the direction of travel in policy divergence, we continue to maintain a bullish disposition towards the USD vs EUR.”

“Expected policy divergence with the euro area is again becoming amplified, reinforcing a trend of USD strength that was in place before the election. The Italian referendum on constitutional reform is now only two weeks away (4 December) and may weigh increasingly on EUR/USD.”