U.S. President Donald Trump has shifted to a less aggressive stance on multiple fronts, including tariffs and a possible removal of the Fed Chair Jerome Powell, leading investors to price in less damage for the economy.
Global shares rallied on Monday after the U.S. and China agreed to temporarily slash harsh reciprocal tariffs and cooperate to avoid rupturing the global economy.
The relief could be temporary, as negotiations will continue in the next few weeks and months. However, there is an additional significant issue to deal with.
“The one policy area where uncertainty remains very high is the U.S. fiscal stance,” says George Saravelos, global head of forex research at Deutsche Bank.
He mentions two key drivers for the dollar: the relative growth and monetary outlook between the U.S. and the rest of the world and the ease with which the U.S. can finance its twin deficits (current account and fiscal deficits).
On the cyclical front, Deutsche Bank believes the newsflow over the last few weeks favours the rest of the world more than the U.S. and works against the dollar.
On the U.S. external financing front, a less antagonistic U.S. administration is more dollar-positive, even if the damage has been done in terms of peak-dollar allocation.
Source: Reuters (Stefano Rebaudo)
