Dollar Loses More Ground as Trump’s Reelection Prospects Improve

September 1, 2020

On the heels of a weak performance in August, the dollar fell another 0.8% against sterling overnight and also lost 0.5% relative to the euro, kiwi, and peso, 0.4% versus the yuan, 0.3% vis-a-vis the loonie, and 0.1% against the yen and Australian dollar. It also costs more dollars today than yesterday to buy commodities like oil (up 1.2%) and gold (+1.0%).

One reason for the softening dollar has been the revised Federal Reserve approach to balancing its mandate of price stability against that of maximizing employment. The inflation target of 2.0% will be no longer treated as a medium-term goal but rather as a target to be met by average inflation over an extended period of time. Since inflation for many years has averaged less than 2.0%, the policy modification implies that policymakers will endeavor to offset that undershoot with inflation more or less commensurately above 2.0% over coming years, and that means the Fed’s interest rates will not rise as soon or as much in the future as thought previously.

While potentially radical, the above announced change had been expected for some time.  A different recent change that may more significantly account for the heavier dollar has been a shift in the U.S. November election’s likely outcome. Two weeks ago early in the Democratic Party Convention, Biden was perceived as the clear front-runner, but the race now seems to be a toss-up with momentum in Trump’s corner. The violent turn in street protests and lessening pace of new Covid cases and deaths have transformed the theme from America’s failed policy response to the pandemic to civil unrest and crime. A likelier Trump victory hurts the dollar in a number of ways:

  1. Trump wants trade deficit reduction and believes that dollar depreciation promotes that objective.
  2. Under Trump, America’s global leadership image has fallen at China’s expense. Reelection would lend new force the two countries’ disparate trends.
  3. Public-sector corruption and authoritarian practices have been more prevalent in the Trump years. Both tendencies erode the intangibles upon which the dollar’s hegemony is built such as political stability and reliable rule of law.

Share prices rose in most markets overnight, but there were some notable exceptions such as the drops of 1.8% in Australian equities and of 1.3% in both the U.K. and New Zealand.

Ten-year U.S. Treasury and British gilt yields are two basis points higher, while their Japanese counterpart slipped one basis point.

Factory-sector purchasing manager surveys covering August were released today for many economies.

  • Euroland’s manufacturing PMI printed at 51.7, a two-month low and matching its preliminary estimate. The resumption of positive growth was shared by a wide range of products and accompanied by near-zero inflation. Among members of the joint European currency area, the national PMI readings ranged from Greece’s 2-month high of 49.4 to Italy’s 26-month high of 53.1. Spain and France posted PMI’s marginally south of 50.0.
  • The British PMI advanced 1.9 points to 55.2 in August, a 30-month high. Output growth and business sentiment were at their best levels in 75 and 28 months.
  • The Swiss and Swedish PMI readings of 51.8 and 53.4 were at 18- and 21-month highs.
  • China’s Caixin-compiled manufacturing index rose 0.3 points to a record high of 53.1, and Taiwan’s 52.2 reading constitutes a 2-year high.
  • Japan’s PMI advanced 0.6 points to a 6-month high but, at 47.2, was below the 50 level separating expansion from contraction for a 16th straight month.
  • India’s PMI leaped 6.0 whole points to a 6-month high of 52.0 but also reflected higher cost inflation.
  • South Korea‘s overall manufacturing PMI went up 1.6 points to a 6-month high but reflected the fastest job-shedding pace in 97 months.
  • The Indonesian and Thai PMIs of 50.8 and 48.7 were at 6- and 7-month highs, while the PMIs reported for Malaysia and Vietnam of 49.3 and 45.7 were the lowest since May.
  • The Russian (51.1), Polish (50.6) and Czech (49.1) PMI readings respectively represent a 16-month higher, a 2-month low, and a 20-month high.
  • Of the two Australian manufacturing PMIs reported today, that compiled by CBA slipped 0.4 points to a 2-month low of 53.6, while AIG’s PMI survey showed a 4.2-point relapse to a 3-month low of 49.3.
  • The ABSA-compiled South African PMI jumped 6.1 points to a 161-month higher of 57.3.
  • Turkey‘s manufacturing PMI settled back 2.6 points but was at a robust level of 54.3.

The lack of inflation indicated in the euro area PMI was further underscored by the preliminary August consumer price figures. The 12-month drop of the total CPI of 0.2% was the most deflationary reading in 52 months and down from +0.4% in July and +1.0% in August 2019. Core CPI dropped 0.8 percentage points to 0.4%. Low inflation persists in spite of a a fourth straight monthly rise of Euroland’s unemployment rate to 7.9% in July versus 7.2% back in March. Italian unemployment climbed another 0.4 percentage points to 9.7%, a 10-month high, but the number of German unemployed workers unexpectedly fell 9k last month.

Japan’s jobless rate ticked up 0.1 percentage point to 2.9% in July, and employment was 1.1% lower than a year earlier. A substantial 11.3% on-year drop in Japanese business investment during the second quarter was also reported today.

South Korean GDP dropped 3.2% in 2Q on top of a 1.3% decline in 1Q. The year-on-year contraction of GDP in South Korea was 2.7%. A $4.12 billion trade surplus in August was almost three times wider than the year-earlier surplus because of a 16.3% plunge in imports.

Australia’s current account surplus of A$ 17.7 billion last quarter was twice the size of the A$ 8.4 billion in 1Q and even more above it’s year-earlier level. Australia also announced a much larger-than-forecast 12% increase in building permits during July. By comparison, New Zealand building permits that month fell 4.5%.

Hungarian GDP dived 14.5% on quarter and 13.6% on year in 2Q. In the Czech Republic last quarter, GDP fell 8.7% on quarter and by 11.0% from a year earlier.

The Reserve Bank of Australia’s Official Cash Rate as expected was left unchanged at 0.25%, its record low since a pair of 25-basis point cuts engineered back in March. Although the deepest downturn since the 1930s, officials conceded that the recession does not appear quite as severe as they feared it would be. At the same time, they warned that Australia still faces an “uneven and bumpy” recovery and reaffirmed their intent not to raise the OCR until they see good progress toward full employment and are confident that inflation is rising back to its 2-3% target corridor.

Officials at the Central Bank of Colombia engineered the sixth policy interest rate cut of 2020, a 25-basis point reduction to 2.0%. The prior two cuts were also 25-basis point moves, while those in March, April, and May were each 50 basis points in size.

Investors await the U.S. manufacturing purchasing managers survey due later this morning.

Copyright 2020, Larry Greenberg. All rights reserved. No secondary distribution without express permission.



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