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U.S. Dollar ‘Thrown Under The Bus’, But Does That Signal A Wider Policy Shift?

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U.S. Dollar ‘Thrown Under The Bus’, But Does That Signal A Wider Policy Shift?

(Kitco News) - The U.S. dollar tumbled to fresh 3-year lows after the U.S. Treasury Secretary Steven Mnuchin welcomed a weaker greenback, triggering worries of a wider trade policy shift.

“USD [was] thrown under the bus,” said John J Hardy, head of FX Strategy at Saxo Bank. “[And] it is taking fire on all fronts.”

The U.S. dollar index plunged around 1% on Wednesday, last seen trading at 89.19, which in return boosted gold’s rally, with prices briefly touching the highest level since August 2016. Spot gold on Kitco.com was last seen at $1,357.70, up 1.25% on the day.

“It has certainly been a rough trading week for the Dollar amid political uncertainty in Washington, with recent comments from Mnuchin fueling the downside,” said Lukman Otunuga, Research Analyst at FXTM. “From a technical standpoint, the Dollar Index is heavily bearish . . . The breakdown below 90.00 could invite a further decline towards 89.60 and 89.00, respectively.”

The move came after Mnuchin said that a weaker greenback was good for trade. “Obviously a weaker dollar is good for us as it relates to trade and opportunities,” Mnuchin said during a press briefing at the World Economic Forum in Davos.

Soon after, U.S. Commerce Secretary Wilbur Ross backtracked, telling CNBC that Mnuchin was “not advocating for a weaker dollar.”

But, Ross also stated that the U.S. is trying to level the playing field, especially in light of China’s protectionism. “The Chinese have been for quite a little while superb at free trade rhetoric and even more superb at highly protectionist behavior,” he said.

These comments triggered fears of a trade war, with analysts expressing new worries about the possibility.

“Global safeguard tariffs announced by President Trump this week alone are unlikely to spark a global trade war. But, when viewed as part of a queue of potential trade actions to come, Trump’s actions cannot be overlooked and may imply a broader pivot on US trade policy,” analysts at TD Securities said.

Some of the main risks are: “Section 232 investigations on steel and aluminum and the Section 301 investigation on China, which together with protectionist rhetoric are potential triggers to a correction in risk sentiment.”

The biggest threat here is that the forex market is not priced in for the change in trade policy rhetoric, according to TD Securities.

“A pivot towards U.S. protectionism should intensify the unwinding of the USD bull market over the coming years. History may not repeat but is sure to rhyme, primarily when the global macro backdrop offers further headwinds for the dollar,” analysts wrote.

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