US dollar the 'big loser' as political turmoil fuels trade war risk

In a trade war, the US dollar is seen to weaken about 12 per cent to 1.40 per euro within two years. — Reuters pic
In a trade war, the US dollar is seen to weaken about 12 per cent to 1.40 per euro within two years. — Reuters pic

WASHINGTON, March 15 — The latest upheaval in President Donald Trump’s administration is moving the US closer to sparking a global trade war that could sink the US dollar.

The risk that the US pivots toward more protectionist policies is increasing with the departure of moderate voices, including Secretary of State Rex Tillerson and White House economic adviser Gary Cohn, said Paresh Upadhyaya, a portfolio manager at Amundi Pioneer Asset Management. The administration’s next move on trade came yesterday, as it announced a challenge to Indian export subsidies.

Upadhyaya pegs the chance of a US-led trade war as high as 30 per cent, an outcome he sees pushing the US dollar about 12 per cent weaker to US$1.40 per euro within two years.

If the US inflames relations with its trading partners, particularly China, and other nations retaliate, investors will likely sell the greenback and seek shelter in the yen, Swiss franc, euro and developed-country sovereign debt, he said. Stocks also stand to suffer, in his view.

“The dollar is the big loser,” said the Boston-based money manager, whose firm oversees about US$83 billion (RM323.5 billion). “The free marketers, the globalists, one by one, are leaving; the arguments are being won by the economic nationalists.”

It’s not just trade and politics that are weighing on the greenback. It’s fallen 3 per cent this year, extending a slide of almost 9 per cent in 2017 that was fuelled by the perception that other central banks would follow the Federal Reserve in withdrawing monetary stimulus.

Tillerson trade

A risk-off tone gripped markets yesterday, pulling the S&P 500 Index 0.3 per cent lower, while 10-year Treasury yields fell to about 2.81 per cent. The Bloomberg dollar index declined to the lowest in more than two weeks. On Tuesday, the US dollar and US shares fell on Tillerson’s ouster, which followed Cohn’s last week after the president imposed tariffs on steel and aluminum imports.

Goldman Sachs Group Inc strategists are looking past protectionism to broader reasons for dollar weakness, including an improving global economy and prospects of tighter monetary policy outside the US. The firm says Trump’s tariffs still fall within the range of actions by previous presidents in the last 20 years, which didn’t spur trade wars.

However, US politics still appear to be driving investor sentiment. A gauge of US political risk peaked this month in data going back to 2016, according to GeoQuant, an analytics firm in New York.

“Currency traders are bailing out of the dollar,” Karl Schamotta, director of global product and market strategy at Cambridge Global Payments in Toronto, wrote in a note.

“This confirms an extraordinary shift in psychology — in the face of turmoil in the White House, the greenback appears to have lost its traditional safe-haven role, with the yen and euro acting as exit valves for fearful market participants.” — Bloomberg

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