Will the US dollar undergo its next downtrend?

The summer months have been particularly quiet for the US dollar. But Steven Barrow, Head of Standard Bank G10 Strategy suspects that things will hot up just as the weather cools down through the autumn.

First up, the Fed is likely to start reducing policy rates, and however much this is anticipated by the market and however much supporters of rate cuts blame economic fragility for the reductions, there will inevitably be a whiff of political pressure on the Fed to ease, and that’s not positive for the dollar. It will be particularly detrimental if inflation data in coming months rises by more than market expectations, for this will surely question the wisdom and unbiasedness of any such rate cuts.

Second up, it looks as if the Trump Administration will be forced to go to the Supreme Court to push through two of its most controversial decisions; the imposition of country-specific tariffs, and the firing of Fed Governor Lisa Cook. Again, policies that require a Supreme Court sign-off are not a good look for the US dollar, especially when the Court is biased 6-3 in favour of Republican appointees; three of them by Trump alone.

On tariffs, Steven Barrow argued even before Trump became president that country-specific tariffs introduced under the International Emergency Economic Powers Act (IEEPA) were illegal. There is no ‘national emergency’ that requires such broad-based country tariffs, but we would not be at all surprised to see the illegality of the tariffs overturned in the Supreme Court. And, even if the Court refuses to overturn the ruling, the Trump Administration can use other provisions to maintain the tariffs.

In short, country-specific tariffs will remain in Steven Barrow’s view, but the manner of their introduction and usage does a disservice to the US dollar. The same can be said about the attacks on the Fed. The case for Cook’s dismissal as a Federal Reserve Governor appears hopelessly flimsy. But, here too, the Supreme Court could see things the other way, if it is bought in to resolve the issue. But just like tariffs, the damage to the dollar has been done even if Cook gets to keep her job. That’s because political pressure on the Fed to ease policy will continue, as will Administration attempts to Gerrymander the Fed in the same way as the Supreme Court.

Stepen Miran, the current National Economic Council Chair will presumably see his confirmation hearing for the Fed Governor role vacated by Kugler pass without incident this Thursday. This will allow him to bring his rate-cutting agenda to the Fed for the September meeting, probably to join Fed-Chair hopefuls Bowman and Waller, who are already voting for rates to be cut. But it is not just rate cuts that are at stake. A Republican take-over of the Fed would give Governors the ability to ditch regional Fed presidents they don’t like at next February’s customary 5-year review. It would also have consequences for supervisory issues, as these are controlled by Fed Governors, not the full FOMC. And this could be of significance given the Administration’s crypto push.

When we put all of these elements together it is hard to make a case for a stronger US dollar. But is the market listening? We did see a steep fall in the US dollar earlier in the year, but things have settled down since then. Steven Barrow expects renewed pressure in the remaining months of the year. He senses already that central banks are more wary. Recent data on the Fed’s custody holdings of treasuries for foreign official institutions (mostly central banks) has been falling sharply, and this in spite of a weaker US dollar.

What about other investors, such as those in the private sector? Data on foreign net purchases of US bonds and stocks do show a rebound from the sharp fall in April but the lack of dollar strength suggests that more investors are hedging these asset purchases, presumably because they are fearful of a fall in the US dollar. Steven Barrow thinks that any such fears will be realised as he sees some headway in coming months towards his longer-term targets of 1.30-1.35 for euro/dollar and 120 -125 against the yen.