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Dollar finds support after hit from Trump rhetoric

The dollar regained some poise on Thursday after president Donald Trump sent the currency retreating late on Wednesday with his assertion that it is “too strong”.

In mid-morning London trading, the dollar index, which tracks its value against a range of other major currencies, was still well below the point of Mr Trump’s comments, but up by 0.3 per cent from its overnight low at 100.27. Sterling was a shade under its highest point of the day at $1.2555, while the euro was also edging lower at $1.0655.

The market reaction to Mr Trump’s rhetoric came as analysts considered the shifting picture for the world’s reserve currency only days ahead of the expected publication of the US Treasury’s twice-yearly report on the foreign exchange policies of the US’s major trading partners. The document, which last came out just before the presidential election, is likely to play an important part in shaping the outlook of investors into the second quarter of a year during which the dollar index has moved between a closing intraday high of 103.82 in early January and a low of 98.858 in March.

On Thursday, the dollar index was 3.2 per cent under its 2017 high point.

Ulrich Leuchtmann, head of FX research at Commerzbank said that unless Mr Trump “quickly performs a similar U-turn in the question of the exchange rate policy as he did in his approach to Syria (which admittedly is possible at any time)” then the pledge in the G7′s London accord to not target exchange rates might also go out the window.

“Nobody cares at the moment. All central banks are currently wallowing in the hope of reflation and see little cause to weaken their currencies artificially,” Mr Leuchtmann said. “However, if reflation does not happen (and that in turn is what falling inflation expectations suggest once again) there is the risk of a currency war. Thank you, President Trump!”

While Mr Trump’s sting was unexpected, and also somewhat at odds with his previous broadsides against other countries’ efforts to cool their currencies, some observers think it has merit.

Lee Hardman at Bank of Tokyo-Mitsubishi UFJ said: ‘’Verbal intervention on its own is unlikely to prompt a sustainable reversal of US dollar strength unless backed up by fundamental drivers as well.

“The increased likelihood of more modest US fiscal stimulus, the Fed’s strong commitment to only gradual tightening, and the gradual ongoing shift towards monetary tightening overseas could all help to ease President Trump’s concerns over the strength of the US dollar in the year ahead.”

Analysis from Rabobank summarised the seemingly conflicting signals facing investors: “Rhetoric and reality are two very different things. Unfortunately, the market’s ability to accurately separate which is which when it comes to Mr Trump makes assessing his policies and the impact these are likely to have all the more challenging.

“The president must now choose the best mix for stimulating growth and maintaining a weaker currency, itself a competing challenge, to say the least.”