Nordine NAAM, Research Analyst at Natixis explains that the sharp correction of the US dollar against G10 currencies and most emerging currencies following the latest revelations of the New York Times, with allegations that Donald Trump urged ex-FBI Director James Comey to back off a probe into former national security advisor Michael Flynn.
“This scandal has given rise to serious concerns about a possible impeachment. In this context, risky assets and the US dollar went on the retreat, to the benefit of the bond markets. The DXY dollar index pulled back below 97.50, while expectations of a hike in the Fed Funds rate in June subsided, the tax reform promised by Donald Trump being seemingly in jeopardy.”
“Does the US dollar still have downside potential? This is possible if there are new revelations that further weaken Donald Trump. However, an impeachment does seem unlikely at this stage. Such a procedure would have to be initiated by the Republican Party since it is in the majority in both Houses. As yet, it would not be in the Party’s interest to launch such a procedure, especially since proving there was an obstruction of justice would be difficult. John McCain, an influential party member, sees no point in launching such a procedure. To appease the Democratic party, ex-FBI Director Robert Mueller has been appointed as special counsel charged with investigating possible collusion between White House staff and Russia.”
“In this context, the US dollar should stabilise in coming days before recovering as the Federal Reserve goes about normalising its monetary policy. Delays pushing through the tax reform should not bring into question US growth (slightly more than 2%) or the tightening of the Federal Reserve’s monetary policy.”
“Market’s attention should shift back to macroeconomic indicators, notably out of the real estate market (new home sales), as well as durable goods orders and the minutes of the last FOMC meeting, in addition to which there will be many speeches by FOMC members (in the wake of the article by the New York Times). In this environment, the US dollar can be expected to firm.”