Cool Video: Bloomberg Television–Dollar Outlook

The issue is the dollar’s outlook. The greenback had looked to be on the verge of breaking out higher before the US President expressed disapproval with the Fed rate hikes and, then the following day, aggressively accused the EU and China of manipulating their currencies.

Laird and I were largely in agreement. The G20 statement recognized many of the risks to the world economy and the US. He anticipates a turn in the data. I have been tracking a growing number of late-cycle indicators (and note that interest rate sensitive sector like housing is showing some strain, perhaps as interest rates climb, existing home sales fell each month in Q2, as did building permits).

We noted Mnuchin’s attempt to walk back what had seemed to many to be Trump’s jawboning of the Fed and trying to talk the dollar down. The market was never persuaded that Trump’s displeasure about rising interest rates would impact Fed policy. To the extent that the Fed funds futures strip has changed, it implies higher rather than lower rates. On the other hand, the dollar is lower. I suspect the short-term momentum players got caught leading the wrong way, and the net result is to reinforce range-trading. Still, going forward, market participants have to recognize the risk of more of these type comments, which may mean little in the greater scheme of things but could inject extra short-term volatility.