The dollar ignores both the plainest of hints and the noisiest of voices .....

ref :- "Fed signal on interest rate cuts fail to weaken dollar" , The Financial Times, International Section

When it comes to the likelihood of the Fed cutting US rates, the market has been pretty adamant for what seems like a very long time indeed ..... it's not a question of "If ?", but one of "When ?" , "By how much ?" and "How many times ?" .

It's true that last week's stronger-than-expected employment data may have caused some of those with the most dovish expectations of Fed actions to scratch their heads for a moment. But even so, the prices of Fed Funds futures tell us that on balance traders think the most likely scenario is still, one 25bp cut this month, and two more by year-end. If it was a simple world, one might reasonably expect those kinds of expectations to undermine the US dollar, especially as rate-cut forecasts have been accompanied by constant presidential haranguing of the Fed for not cutting sooner, and of a host of other nations for unfairly weakening their own currencies. This being anything but a simple world, the trend of dollar strength in place since February of last year (up over 2.5%) is still well intact.

Whatever President Trump may say about it, the primary factor behind dollar, strength has been an economy that has markedly outperformed those of the US' competitors, a phenomenon that Mr Trump is happy to take the credit for.. That in turn induced the Fed to hike the rate of Fed Funds to the current band of 2.25% - 2.50% as a precaution against the kind of rising inflation that in the past would have accompanied unemployment rates falling to 50yr lows. Now the President argues that since there has been no sign of troublesome inflation, the Fed had no reason to raise rates that far and every reason to lower them more quickly.

It's always easier to argue with the benefit of hindsight, and one needs to remember that not even the sharpest minds are 100% certain of how the dynamics behind inflation work in the modern era. But there is a distinct possibility that Mr Trump will be proved right on this one. To be frank, at one level that's not a particularly appealing prospect but whatever the case US rates will still be at a significant premium to those of other mature economies and it is that differential that has continued to support capital inflows into the dollar.

As we've no doubt mentioned before, we're fascinated by the President's selective appreciation of markets. At least until they turn around, Mr Trump is delighted to assert that the record-breaking performance of stock markets is an entirely accurate reflection of his management of the economy. But at the same time, the value of the dollar is a function of an inept Federal Reserve and other nations cheating to force their own currencies to lower to gain a commercial advantage.

The accusations of currency manipulation by others have become a near-constant refrain for the President. That would be fair enough if we knew the accusations were true, but if not then they betray either an inability to absorb what even his own officials are telling him, or a willingness to disregard inconvenient facts and bully others into line.

Consider :

In May, the US Treasury added Ireland, Italy and Germany onto its currency manipulation "watchlist" -- alongside the likes of China, Vietnam and Singapore. We all know that Germany's export-led economy has done extremely well out of a shared currency (the Euro) rather than a national currency which would have been much stronger. But the fact is that as members of the Eurozone, none of the new names have direct control over monetary policy. The FT quotes analysts who describe the inclusion of Ireland and Italy on the list as akin to malpractice and describe large elements of the US Treasury's latest report as little short of insane.

By the Treasury's own definition, to justify a US accusation of being a currency manipulator, a nation has to "fulfil" three criteria :

a.) Having a significant bilateral trade surplus with the US

b.) Having a "material" current account surplus

c.) Persistently (and one-sidedly) intervening in foreign exchange markets.

China, the country most often accused of being a manipulator by President Trump, has certainly had a significant trade surplus with the US but has a very small current account surplus overall (which will go negative by 2022, according to the IMF) and there is no evidence whatsoever of FX intervention in recent times. So even the Treasury can't make the manipulator tag stick ..... which does not seem to bother Mr Trump.

It's a well-known fact that China hasn't always had such clean hands on the subject of manipulation, but weakness in the Yuan can largely be put down to the effects of the trade war and resulting stimulative measures .... in other words, the result of US policy. And besides, post-financial the crisis it was the US who slashed rates without much thought as to how it would affect others, in particular emerging markets. Many had to intervene to sell their own surging currencies that were destroying their export performance.

Right now, the US is happy to portray itself as the victim of others' wrongdoing. If Mr Trump should choose to fight dirty about it, there's little doubt that he has a big arsenal at his disposal in terms of sanctions and possibly direct intervention on foreign exchange markets. But there remains a slight suspicion that there is a difference of opinion between the President and the Treasury ..... and given the fact that the Treasury can't fit the targets of Mr Trump's ire into their own definition of a manipulator, there certainly should be. But it's always possible that the force of nature that is Mr Trump will force the Treasury into his way of thinking whether or not it meets the criteria .... and that's got to be a worry.

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