18:27 GMT07 May 2021
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    The US dollar’s recent gains in currency trading reflect the lingering downward pressures on US manufacturing and corporate profits; however, the FX risks are not seen as such by the Federal Reserve and the US Treasury – yet.

    Kristian Rouz — In Tuesday's trading, the greenback advanced to its four-month high against the basket of currencies, partially based on the weakness of the basket's emerging market counterpart and Brexit-stirred currency fluctuations in the UK and the Eurozone. However, the main reason behind the dollar's underlying strength, which has hurt the earnings of US-based multinationals and undermined US manufacturing, is the Federal Reserve's approach to monetary policy, suggesting the currency's FX rate reflects the health of the economy.

    Within the Fed data-dependent view of the broader economy, which is focused on consumer demand and labor market developments, the stronger-dollar policy remains a major advantage to a wide selection of overseas economies, which boost their growth through devaluations. Meanwhile, as US growth remains subdued with only a modestly optimistic outlook, the greenback's gains are sending a negative signal to the domestic non-financial sector enterprises.

    Following Tuesday's release of housing market data, which revealed moderate gains on the supply side and suggested that US GDP gains would be about 2.5 percent for 2Q16 or higher, the DXY dollar index, tracking the greenback's performance against its six major peers, gained 0.5 percent to 97.048. The euro dropped to its 11-day lowest at $1.1011, exceeding the 0.5 percent losses of the previous session.

    "There's more enthusiasm about the U.S. economy," Vassili Serebriakov of the New York branch of Credit Agricole said. "It hasn't really translated into a big increase in Fed tightening expectations but I think markets are starting to think the Fed could be back in the picture before the end of the year."

    These developments, however, are not only bringing the Fed tightening narrative back to the table, but also revive concerns regarding the commercial earnings of US-based companies, one of the US economy's cornerstones (along with domestic consumption, manufacturing and construction). A stronger dollar slashes multinationals' revenues from overseas operations, while the abundance of cheaper imports hits US manufacturing.

    The dollar stalemate, with stronger greenback benefitting the consumer while hurting the producer of goods and services, is passed on to the Fed's indecisive stance on the currency's FX rate.

    "It's difficult for a Treasury secretary to say they don't want a strong dollar, because that will be seen as a sign of economic weakness," Eswar Prasad, the author of the 2014 book "The Dollar Trap" says.

    The current US administration still sees a stronger dollar as benefitting the US in that that it sends investors the message that the US economy is a safe and promising destination for their money. However, as this relates to globalization in the broader sense, such an attitude benefits foreign entities, while sacrificing US-based companies, both in the financial services sector and the real economy. The same is said of US-backed trade treaties like TTIP and TPP, which have been challenged for alledgedly being unfair for the US.

    "I have long taken the view, as have my predecessors, that a strong dollar reflects a strong US economy. And it's in the US interest," Jack Lew, Secretary of the Treasury, said in his post-Brexit commentary on CNBC, broadcast on the June 27.

    ​In the wake of the financial turbulence in the fixed-income and equity segments of the US financial market, the WSJ dollar index remains 1 percent down over the last year, after having advanced above 35 percent during the previous five years.

    As the 2016 presidential election nears, the two major candidates for the office, Donald Trump and Hillary Clinton, seemingly have opposing views on the current dollar stalemate.

    While refraining from harshly criticizing the current state of affairs with the dollar — quite an unusual behavioral pattern for him — Trump has pointed out the downsides of the dollar's strength to the US economy.

    "In many respects obviously I like a strong dollar," he said in May during a CNBC broadcast. "While there are certain benefits, it sounds better to have a strong dollar than in actuality it is."

    Clinton never commented on the FX rate's economic implications, yet, as a perceived status quo candidate, she is widely expected to continue the economic legacy of the Obama administration. 


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