Dollar Is `Big Loser' as Political Turmoil Fuels Trade-War Risk
The risk that the U.S. pivots toward more protectionist policies is increasing.
(Bloomberg) -- The latest upheaval in President Donald Trump’s administration is moving the U.S. closer to sparking a global trade war that could sink the dollar.
The risk that the U.S. 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 Wednesday, as it announced a challenge to Indian export subsidies.
Upadhyaya pegs the chance of a U.S.-led trade war as high as 30 percent, an outcome he sees pushing the dollar about 12 percent weaker to $1.40 per euro within two years. If the U.S. 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 $83 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 percent this year, extending a slide of almost 9 percent in 2017 that was fueled by the perception that other central banks would follow the Federal Reserve in withdrawing monetary stimulus.
A risk-off tone gripped markets Wednesday, pulling the S&P 500 Index 0.3 percent lower, while 10-year Treasury yields fell to about 2.81 percent. The Bloomberg dollar index declined to the lowest in more than two weeks. On Tuesday, the dollar and U.S. 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 U.S. 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, U.S. politics still appear to be driving investor sentiment. A gauge of U.S. 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.”
--With assistance from Katherine Greifeld and Molly Smith
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