As the week drew to a close, the USD has surged, catapulting the dollar index to its loftiest heights since the autumn of 2022, a period marked by severe energy price shocks.
(Chart H/T Barchart)This resurgence is fueled by mounting anxieties about global growth prospects, particularly as another trade war emerges under President-elect Donald Trump’s leadership. Additionally, escalating geopolitical tensions between Russia and the West have spiked demand for the USD as a “ safe-haven.”Compounding this dynamic is the re-emergence of political uncertainties in France, where the National Rally poses a significant threat to the government’s stability over budgetary disputes. This political turmoil has prompted market participants to brace for potential policy shifts, anticipating a growing divergence between the monetary policies of the Federal Reserve and European central banks. This anticipation shifts yields in a direction favouring a robustly stronger USD, underscoring the currency’s renewed vigour in the international financial landscape.
I coined the “do not overthink the Euro lower” trade even before the EU PMI hit, having also signalled a short on EURJPY last Thursday, so my Euro lower conviction is solid. Despite expecting a more hawkish stance from Ueda in his Tokyo address, the trends in core-core inflation, driven by services inflation, point to a stabilizing yen via more hawkish pricing for Dec or Jan rate hike. This development lowers the likelihood of a sharp yen depreciation by year-end. Consequently, the Bank of Japan may consider a preemptive rate hike in December to strengthen the yen. The setup has worked so far.Last Friday’s disappointing eurozone PMIs precipitated a notable slide in EUR/USD, breaking it out of a two-year trading range. In stark contrast, the U.S. economy is pulsing with energy, evidenced by November’s S&P PMIs—highlighting the fastest growth since April 2022, especially within the thriving services sector. This sharp economic contrast bolsters my prediction of further EUR/USD declines in the upcoming weeks.Adding to the euro’s burden, the intensifying Russia-Ukraine conflict raises the spectre of worsening conditions towards year-end, affecting economic stability and markets. This turmoil coincides with discussions of a Trump-led ceasefire in January, which, if successful, could potentially mitigate some of the euro’s descent.While the euro’s recent decline might find temporary respite in the seasonal trend from a weakening dollar in December, Trump’s vigorous domestic and trade policies will likely sustain downward pressure on the euro. The caveat is that the future of the ‘Trump Trade’ *( see below Lutnick effect) remains uncertain and relies on realized Trump policies in tandem with global economic conditions; the consensus is the USD’s current upward momentum is strong against all G10 currencies.Political and economic instability threatens further destabilization in the eurozone. Rising political risks, exemplified by France’s budget crisis and expanding OAT/Bund spreads, indicate increasing turmoil.
( Chart H/T via Bourse Italiana )Investor confidence is eroding rapidly, as evidenced by $3.6 billion fleeing Europe for the eighth consecutive week, per EPFR data—a stark marker of deep-seated market trepidation.Moreover, the energy sector is under strain, with LNG prices reaching new highs amid disputes between Russia’s Gazprom and Austria. This heralds significant supply challenges as a crucial gas transit agreement approaches its expiry.Germany’s industrial sector, already grappling with high energy costs and a sluggish transition to electric vehicles, faces severe repercussions. Major firms like Volkswagen must contemplate unprecedented factory shutdowns and extensive layoffs.Amid these upheavals, the US dollar emerges as a bastion of stability, sharply contrasting with the euro’s fragility. Political crossroads in Germany offer a glimmer of hope with potential debt brake reforms, providing a modicum of fiscal maneuverability.However, in this turbulent context, the only apparent “light at the end of the tunnel” is the relentless advance of the US dollar, metaphorically charging forward like a freight train, starkly underscoring the euro’s weaknesses.LUTNICK EFFECTPresident-elect Trump has chosen Howard Lutnick to serve as the next US Commerce Secretary, a role that will also include direct oversight of the Office of the United States Trade Representative. This appointment positions Lutnick at the helm of the US trade department, where he will spearhead the administration’s tariff and trade strategies. Known for his staunch support of Trump’s aggressive tariff policies, Lutnick’s selection signals a clear intent to implement higher tariffs at the onset of Trump’s second term, reinforcing expectations of a more protectionist trade stance from the administration.More By This Author:Asia Open: A Show Of Resilience Amid The Looming Shadow Of President-Elect Trump?
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