‘Rip-Roaring’ Dollar Rally Threatens Economic, Disinflationary And Political Headwinds

The dollar rose for a second day following Jerome Powell’s “muddled and confusing” press conference, during which the beleaguered Fed chair accidentally stumbled into the worst possible market outcome: a stronger greenback, a flatter curve and plunging stocks.

“He described the mood as a mid-mid-cycle adjustment, and markets are worried that means there isn‘t much more easing coming [so] cue further equity market weakness and further dollar strength”, SocGen’s Kit Juckes wrote Thursday, adding that “as long as the US economy outperforms others and barring a much more dovish turn from the Fed, the President is going to find the dollar’s trend frustrating”.

Indeed, Donald Trump expressed his frustration on Wednesday evening, and he’s likely to vent further on Thursday.

The DXY is now sitting at its highest since May of 2017, the month after Trump expressed a bit of consternation about dollar strength during an interview with the Wall Street Journal.

“In the end, it’s all about superior US growth against a backdrop of weak global trend”, SocGen’s Juckes went on to say.

And therein lies the really troubling part of this for Trump. His penchant for bragging about the US economy is complicated by the fact that the same relative economic outperformance is contributing mightily to the dollar’s stubborn refusal to roll over. He wants a weaker dollar to help boost the US economy, but it’s the US economy’s existing strength that keeps the dollar supported.

“The risk was that the Fed’s inability to match extremely dovish ‘Fed easing cycle’ pricing could cause a shock US Dollar appreciation which then acts to tighten financial conditions”, Nomura’s Charlie McElligott wrote Thursday morning, describing the dollar situation as a “disinflationary force + export headwind + political lightning rod” equation.

Powell’s inability to live up to market expectations despite the cut and the early end to runoff now sees DXY “blasting to new 27 month highs and in the midst of its largest 10d appreciation since last August’s volatility spasm”, McElligott goes on to say, adding that “anything less than [the] nearly 100bps of cuts priced looking out a year” was going to be a de facto tightening, leading to “a rip-roaring US Dollar rally”.

If that continues, he warns, it will likely serve as “a catalyst for further economic, disinflationary and political headwinds between now and the upcoming September 2019 meeting”.