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From trade war to currency thaw?

Weekly investor research

15 July 2019

It is high time for new and constructive ideas in global finance. The Trump Trade War has failed. There may not yet be any concrete signs that the US government is engaging in direct currency intervention to weaken the Dollar, but it is no longer outside the realm of possibility. The late stage of the economic cycle, the increasing scarcity of easing options in the US and the stated policy preferences of the Trump Administration all point to the possibility that the Dollar could be weakened by official means. This would help the US economy in ways the trade war never could. Indeed, from a global growth perspective the world is far better served if the marginal Dollar flowed out of the US and into the Emerging Markets (EM) rather than flowing into already over-financed and over-bought developed markets. Fed Chairman Jerome Powell noted last week, correctly in our view, that no one should assume that the Dollar’s status as the global reserve currency will be permanent. The key question is who should partner the US government in an effort to weaken the Dollar. China is the obvious answer, but a broader programme involving other Emerging Markets would be hugely beneficial for global growth, and certainly far superior to a currency accord revolving only around developed market currencies. So the challenge is clear: a push into EM FX would require policy-makers to think outside of the conventional boundaries. Maybe this is the right time. After all, so many other preconceived notions have been discarded in recent years.

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