President Donald Trump sent currency markets into a tizzy late Wednesday when he signaled his preference for a weaker dollar. “I think our dollar is getting too strong, and partially that’s my fault because people have confidence in me," Trump told the Wall Street Journal.
Although the greenback immediately dropped before stabilizing Thursday, that's only part of the story. In fact, it has been falling all year as traders lose confidence in Trump's ability to push his pro-business, pro-growth policies through Congress. Judging by the Federal Reserve's U.S. Trade Weighted Real Broad Dollar Index, the currency is weaker now than at the end of November, the month of Trump's election victory. Other markets are sending similar signals. Stocks are rolling over and yields on Treasuries suggest optimism for stronger economic growth is quickly fading.
"His claim that the dollar is too strong is not new, but it is the first time he has ventured down that path since the inauguration," the currency strategists at Brown Brothers Harriman said in a report. "If a leader of another country said what he did, they likely would be accused of manipulating their currency. That said, in the U.S. Treasury's criteria of currency manipulation, jawboning does not count."
BOND BULLS VINDICATED
Trump's comments also gave a boost to Treasuries, which were already benefiting from traders seeking a haven amid heightened geopolitical risks around the world. That's because besides talking about the dollar, Trump also said the U.S. wouldn't designate China a currency manipulator. The bond market let out a sigh of relief because that lessens the chance that China, which is America's largest foreign creditor after Japan, would retaliate by purchasing fewer Treasuries. According to the strategists at BMO Capital Markets, current yields suggest that traders have "now priced out a significant amount of the optimism linked to Trumponomics." Treasuries are poised to rally for the fifth straight week, the longest stretch since July. Unlike at the beginning of the year, almost no one is talking about looming selloff.