Download FX FOCUS US dollar

Helaba Research
FX FOCUS
7 June 2017
US dollar
AUTHOR
Christian Apelt, CFA
phone: +49 69/91 32-47 26
[email protected]
EDITOR:
Claudia Windt


PUBLISHER:
Dr. Gertrud R. Traud
Chief Economist/
Head of Research
Helaba
Landesbank
Hessen-Thüringen
MAIN TOWER
Neue Mainzer Str. 52-58
60311 Frankfurt am Main
phone: +49 69/91 32-20 24
fax: +49 69/91 32-22 44

Most recently the US dollar depreciated noticeably, not only but especially against the euro.
The British pound was similarly weak. By contrast, a few emerging market currencies like
the South African rand gained ground.
The US dollar has been tending toward weakness since the beginning of 2017. The initial
Trump euphoria has subsided and has almost flipped into the opposite. And the US
economy overall is not running smoothly, either. The Federal Reserve will therefore
maintain its cautious course of interest rate hikes. The valuation of the Greenback remains
high. The euro-dollar exchange rate should climb at times to as high as 1.15. However, the
ECB is putting limits on the potential for appreciation.
Helaba Currency Forecasts
Performance on a month-over-month basis
% vs. euro compared to the previous month (from 05/08 to 06/06/17)
US dollar
-3,1
Japanese yen
0,3
British pound
-3,3
Swiss franc
0,6
Canadian dollar
-1,4
Australian dollar
-1,6
New Zealand dollar
0,7
Swedish krona
-1,1
Norwegian krone
-1,0
Czech koruna
1,3
Polish zloty
0,8
This publication was very
carefully researched and
prepared.
However,
it
contains
analyses
and
forecasts regarding current
and future market conditions
that are for informational
purposes only. The data is
based on sources that we
consider reliable, though we
cannot
assume
any
responsibility for the sources
being accurate, complete,
and
up-to-date.
All
statements in this publication
are
for
informational
purposes. They must not be
taken as an offer or
recommendation
for
investment decisions.
Hungarian forint
1,0
Russian ruble
-0,1
-1,2
Turkish new lira
-1,2
South Korean won
Chinese yuan
-1,5
Indian rupee
-2,8
2,9
South African rand
Brazilian real
-5,5
2,0
Mexican peso
■ Core currencies ■ Rest of G10 ■ Currencies of emerging markets
Sources: Bloomberg, Helaba Research
HELABA RESEARCH · 7 JUNE 2017· © HELABA
1
FX FOCUS US DOLLAR
USD: Trump handicap
The much-talked about dollar boom has not only been losing impetus for quite some time; in recent
weeks it even reversed course. Since the beginning of the year, the euro-dollar exchange rate has
climbed from 1.05 to nearly 1.13 most recently. One could almost think that some “deal” was struck
between the US president and the German chancellor. While Trump has been saying for quite
some time that the US dollar is too strong, Merkel recently mentioned that the euro is too weak.
But currency markets don’t operate quite that simply. In times of flexible exchange rates, the heads
of governments do not determine the rates, especially since some politicians in the euro zone,
especially from the southern countries, hold very different opinions from Chancellor Merkel.
Irrespective of the fact that formal responsibility lies with the US Treasury Secretary, politics
influences the currency market de facto only indirectly. In general, the central banks play a larger
role.
Trump is not wrong
The proposition that the euro is weak and the US dollar too strong contains more than a kernel of
truth. On the basis of purchasing power parities or real exchange rate indexes, a historical
comparison quickly arrives at the conclusion that the euro is clearly undervalued against the US
dollar. This is also indicated by the current account balances of the two currency spheres. While
the US is running a noticeable – though not extreme – deficit, the surplus in the euro zone is
almost at a record level. However, Trump called only the German trade surplus “bad”.
US dollar overvalued against the euro
Euro zone with large current account surplus
USD
Net current account balance in % of GDP
Sources: Macrobond, Helaba Research
Sources: Macrobond, Helaba Research
Dollar initially reacted
positively to Trump
% points
President Trump clearly feels strongly about the US export industry, which is why he wants a
weaker US dollar. After his victory in the election, the financial markets priced in a “reflation policy”.
Thanks to higher government spending and massive tax cuts, growth and inflation should rise, and
that would bring higher interest rates and a stronger dollar in their wake. Accordingly, the
Greenback appreciated strongly. That was hardly to Trump’s liking.
By now, the gains of the US currency have evaporated. So far, Trump has had difficulty finding
majorities for his policies – as in the case of health care reform. The same should hold even more
true for other schemes, especially since the Russia affair is weakening the government. The
expansionary measures should be delayed, at the least. Apart from that, it is questionable at any
rate whether the higher budget deficits this would entail would truly support the US currency. Past
experiences would tend to argue otherwise.
However, Trump is not the only explanation for the dollar depreciation this year. In the first quarter,
the US economy posted only very modest growth at an annualized rate of 1.2 %, which was slower
than the euro zone. Many other economic indicators – most recently even the previously robust
labour market – tended to post negative surprises, in contrast to the euro zone. The US central
bank has raised its key interest twice since last December, and a third hike is pending in June.
HELABA RESEARCH · 7 JUNE 2017 · © HELABA
2
FX FOCUS US DOLLAR
Overall, however, the Fed is maintaining its cautious course. Inflation has probably passed its peak
for now, and the core rate (minus volatile energy) is also proving moderate.
Economic momentum supports the euro
USD
US yield advantage vs euro waning
difference in indexes
USD
Sources: Macrobond, Helaba Research
Euro-dollar rate with
limited potential
% points
Sources: Macrobond, Helaba Research
Although US yields show an advantage against German Bunds, given the cautious stance of the
Fed that advantage will hardly grow. Since the major political cliffs in Europe have been
circumnavigated for now after the elections in France, there is more that argues in favour of the
euro. The euro-dollar exchange rate should climb to as high as 1.15 in the coming months. Trump
and Merkel can take pleasure in that, only Mario Draghi views the situation differently. With its
hesitant and halting departure from its expansionary policy, the ECB will cap the potential of the
euro, with the result that the euro appreciation will run out of steam.
Helaba Currency Forecasts
Performance
year to date 1 month
vs. Euro
current*
Q2/2017
Forecast horizon at end ...
Q3/2017
Q4/2017
Q1/2018
(vs. Euro, %)
US dollar
-6,7
Japanese yen
-0,3
0,3
123
121
121
115
120
British pound
-2,3
-3,3
0,87
0,90
0,90
0,85
0,85
Swiss franc
-1,2
0,6
1,08
1,08
1,10
1,10
1,10
Canadian dollar
-6,9
-1,4
1,52
1,47
1,52
1,49
1,49
Australian dollar
-2,8
-1,6
1,50
1,47
1,47
1,45
1,47
Swedish krona
-2,0
-1,1
9,77
9,50
9,30
9,10
9,10
Norwegian krone
-4,7
-1,0
9,54
9,30
9,10
8,90
8,90
Chinese yuan
-4,2
-1,5
7,66
7,59
7,99
7,70
7,70
6,9
3,5
109
110
105
105
109
Swiss franc
5,9
3,8
0,96
0,98
0,96
1,00
1,00
Canadian dollar
-0,1
1,8
1,35
1,34
1,32
1,35
1,35
Swedish krona
5,1
2,1
8,66
8,64
8,09
8,27
8,27
Norwegian krone
2,2
2,3
8,46
8,45
7,91
8,09
8,09
Chinese yuan
2,2
1,6
6,80 1,57
6,90
6,95
7,00
7,00
vs. US-Dollar
Japanese yen
US-Dollar vs. …
-3,1
1,13
1,10
1,15
1,10
1,10
(vs. USD, %)
(vs. USD, %)
British pound
4,6
-0,2
1,29
1,22
1,28
1,29
1,29
Australian dollar
4,1
1,6
0,75
0,75
0,78
0,76
0,75
*06.06.2017
Sources: Bloomberg, Helaba Research 
HELABA RESEARCH · 7 JUNE 2017 · © HELABA
3
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