What’s next for the USD?

Coronavirus fears have prompted a ‘flight to safety’ for investors, which has resulted in a short-term boost to the value of the US dollar as a traditional safe haven currency.

The US dollar Index reached a two-half year high in mid-February, but a slowdown in industrial production in both December and January means we could see the Federal Reserve moving to cut rates sooner than expected, which would help to weaken the US dollar.

President Trump has been insistent that the Fed should cut rates to help boost the US economy, but it is economic conditions rather than political pressure which take the lead for now. This may take a twist as of yearend, with four out of the seven Fed board seats already filled by Trump appointees, there are still two more seats to fill post-election. Trump has been vocal in his disappointment in the Fed for not cutting rates to zero and has since nominated two economists, Christopher Waller & Judy Shelton, thought by many to be both very enthusiast in supporting calls for zero/negative interest rates.

Now President Trump has been acquitted by the Senate in the impeachment hearings, he heads towards the US presidential election primaries. March 3 marks ‘Super Tuesday’ a day when the greatest number of states hold polls as the parties choose their candidates in advance of the presidential election in November.

Whether the impeachment proceedings will have any impact – good or bad – for President Trump is unknown as yet, but for now he’s continuing with business as usual.

Who’s in the running?

It’s unlikely the Republicans will have a candidate running against Trump, but it’s not impossible. Front runners so far for the Democratic candidacy include Bernie Sanders who is garnering support from the left (along with Elizabeth Warren), with more moderate candidates in Joe Biden and Pete Buttigieg who are thought to be better for businesses. Former mayor of New York City, Michael Bloomberg’s entrance to the field will be interesting to watch.

It’s the economy…

In any US election year, the state of the economy is a primary focus – so much so that during Bill Clinton’s campaign in 1992, there was a sign in the Little Rock headquarters that read “It’s the economy, stupid!”¹ in case anyone forgot the priority.

It’s unlikely to be any different for President Trump this year. His ongoing US-China trade war has been halted for now as the signed phase one agreement prevents increases in tariffs². Whether Trump’s ‘Make America Great Again’ approach – likely to continue as a rallying cry in election year – will lead to a phase two agreement being signed anytime soon remains to be seen. There is also growing global concern about the coronavirus outbreak, now officially become more deadly than SARS³, which could also come into play.

As a result of coronavirus, the US dollar has strengthened due to its status as a safe haven currency in times of crisis. On January 6, the day before China confirmed the coronavirus identification as a new virus, the pound was worth USD$1.3171. Since then, the US dollar has attracted safe haven demand, strengthening to US$1.2931 on February 7 – a near 3 cent move in just over five weeks.

How has Trump’s economy fared?

While President Trump likes to laud his prowess on the economy, the figures show things could have been better. The latest figures from the US Bureau of Economic Analysis shows that US GDP has fallen since 2018 from 2.9% to 2.3% in 2019⁴, missing Trump’s 3% goal.

The 2018 boost was the result of heavy tax cuts which worked well for a year but have little potency after they have washed through the system in an annual cycle. The Federal Budget deficit has also grown to US$1 trillion⁵, and the manufacturing and farming sectors have both been hit by the US trade war with China. If he chooses to use the trade war as a bargaining chip as the November election nears, the response from key voters could be very interesting.

A rollercoaster year ahead for the US dollar

Businesses and individuals buying or selling US dollars in the first quarter of the year will inevitably have to watch for the ways in which the election and the trade war interlink. A key factor will be who Trump’s presidential opponent is – the US dollar could weaken, strengthen or stagnate based on which Democrat he is running against.

The US Federal Reserve has some wiggle room when it comes to the strength of the US dollar. Because interest rates are currently sitting at 1.75%, it can cut rates to help boost the economy if necessary.

This helps because it means interest rates on mortgages and other credit also tends to fall, so businesses and individuals have more money to spend on goods and services. This means interest rates on mortgages and other credit tends to fall, so businesses and individuals have more money to spend on goods and services.

¹ https://prospect.org/power/economy-stupid/
² https://www.reuters.com/article/us-usa-trade-china-details-factbox/whats-in-the-us-china-phase-1-trade-deal-idUSKBN1ZE2IF
³ https://news.sky.com/story/coronavirus-wuhan-virus-death-toll-overtakes-sars-11928259
⁴ https://www.forbes.com/sites/chuckjones/2020/02/10/trumps-economic-scorecard-3-years-in-office/#aff5b987847f
⁵ https://www.forbes.com/sites/chuckjones/2020/02/10/trumps-economic-scorecard-3-years-in-office/#aff5b987847f

This is an excerpt from the OFX Currency Outlook. Download the full report for expert commentary on current global events and their potential impact on key currencies including the pound, euro, AU dollar and US dollar.

In October 2020, the drivers of the currency market are likely to be: