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The escalation of ‘cold currency wars’ among major currencies was the dominant news story last week. The week ended with Trump and the US dollar going face-to-face with currency foes – China and Japan.

Trump has accused Chinese and Japanese central bankers of taking covert monetary actions to keep their currencies artificially low to increase exports. The European Union, United States and United Kingdom have also been accused of engaging in currency manipulation to boost trade, according to Joachim Fels, Global Economic Advisor of investment management firm Pimco.

US Dollar

Newly elected President Trump wants a weaker dollar as part of his strategy to make America great again. A less expensive dollar will boost exports of manufacturing goods. But the dollar has remained strong after his election. Friday the US Dollar Index (DXY) flirted with 101, a price not seen since President Trump’s inauguration on January 20th.

US Dollar Index

The dollar gained more strength against other major currencies on Thursday and Friday after President Trump promised to announce ‘phenomenal’ corporate tax reforms in coming weeks. The major US stock indices hit record highs on the news, backed by strong corporate earnings reports during the day.

British Pound

The Bank of England is the latest central bank to be accused of talking down the value of its currency. Last week, the bank announced a major inflation indicator would decline, sending a dovish signal to the market. The pound was down on Tuesday’s announcement of poor January retail sales.

By mid-week, the UK economy showed resiliency towards Brexit when British parliament voted for a hard Brexit. Hours before the Brexit vote Bank of England monetary policy committee member Kristy Forbes hinted at an interest rate hike, providing support for the pound against major currencies. The pound fell but remained above the sensitive 1.24 threshold analysts have identified as an indicator of its short-term outlook.

Flat on GBP/USD
Flat on GBP/USD

More volatility ahead? Moving forward, fluctuations in the pound will be sensitive to the ‘dynamics’ of the UK’s ongoing Brexit negotiations with the European Union, notes Forbes.

Euro

High debts in Greece and Italy have raised the specter of another round of painful debt restructuring for the Euro zone. The sale of European bonds weakened the Euro last week. During the 2015 Grexit crisis, the European Central Bank showed its willingness to engage in aggressive bond buybacks to defend the single currency. Mid-afternoon Friday, the EUR/USD was down on the week hovering around 1.0610 but still above January lows.

EUR/USD Weekly chart
EUR/USD Weekly chart

Meanwhile, Euro jitters in response to political uncertainty around the French political elections are expected to continue at least up to the two rounds of voting in April and May. Flight to safer currencies and Euro hedging have increased since anti-EU National Front leader Marine Le Pen took to the campaign trail a few weeks ago.

The Yen and Yuan – A Currency War Détente?

On Friday the cold currency wars played out in Washington when President Trump and Japanese Prime Minister Shinzo Abe met face-to-face. Trade and foreign exchange policy were on the top of the agenda. While denying an intentional Yen devaluation, the Yen had been strengthening against the dollar since Wednesday and by Thursday, led export-sensitive stocks downwards. Ahead of Friday’s meeting, the USD/JPY broke through 114, regaining January ground.

USD/JPY chart

In a surprising turn on Thursday, Trump broke a stalemate with China and extended a dove branch in the form of a letter and phone call to Chinese President Xi Jinping. The Chinese yuan responded by falling against the dollar on Friday, giving up some strength after short-term interest rate hikes by China last week.

Friday’s markets opened in China with the release of stronger-than-expected imports and exports for January, resulting in a trade surplus of $51.35 billion. Earlier in the week, 50 FX strategists surveyed by Reuters predicted a lower yuan over the next 12 months. While Trump has toned down his election rhetoric of currency manipulation, a complete détente in the currency wars is unlikely.

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