Washington Insider-- Tuesday

Growing Pressure on the Dollar

Here's a quick monitor of Washington farm and trade policy issues from DTN's well-placed observer.

Dairy Industry Pushing on Trade

A bipartisan group of 61 senators want U.S. Trade Representative Robert Lighthizer and USDA Secretary Sonny Perdue to make it a “core” trade policy objective to strike trade deals that allow U.S. dairy producers to sell their products using common names that originated in Europe.

“Our competitors continue to employ trade negotiations around the world to prohibit American-made products from using common food [and drink] names … such as bologna, parmesan, chateau and feta, which have been in use for decades,” the senators said in a letter.

Dairy groups, including the National Milk Producers Federation and the U.S. Dairy Export Council, want future trade deals to include stronger terms than were included in the U.S.-Mexico-Canada Agreement, (USMCA) which went into force July 1.

US-UK Trade Talks Continue This Week

U.S. Trade Representative Robert Lighthizer will meet this week with UK International Trade Secretary Liz Truss who the Financial Times said would relate her frustration at American officials over “punitive” tariffs levied on British goods.

Truss' visit to Washington underlines the UK's desire to strike a trade deal with America quickly, despite U.S. officials saying final talks on a new trade accord would not likely be completed by the end of the year.

Truss told the Financial Times that, while U.S. officials “talk a good game on free trade and low tariffs, the reality is that many of our great British products are being kept unfairly out of their market.”

She is expected to raise the retaliatory tariffs as part of the Airbus and Boeing dispute in the aviation sector, as well as the prospect of further tariffs being levied on British goods.

Washington Insider: Growing Pressure on the Dollar

Bloomberg is warning this week that the dollar is “flashing a warning sign” to U.S. policy makers pushing them to “get a grip on the virus.” After hitting an all-time high in March, the dollar lost 10% of its value, with declines accelerating in recent weeks as infections spread seemingly unchecked across the nation.

Early on in the pandemic, the dollar soared after investors sought safety in U.S. assets like Treasuries while the virus stormed through Europe. But with cases now exploding, “the ineffectual American response has become a millstone for the currency, spurring concern about lasting damage to the U.S. economy that could keep interest rates and growth low for years.”

“What people are most desperately waiting for is good news on virus control,” said Stephen Jen, chief executive at Eurizon SLJ Capital Ltd. “The currency bet is mainly a bet on relative control of the virus, not reflecting the fundamental strength of the economies in question.”

The U.S. government's handling of the pandemic — which contrasts with the euro area's progress in containing infections — is now a key driver of the greenback.

The dollar's losses have often deepened during the U.S. trading day, suggesting investors were selling after the latest virus figures were released. Speculators are now the most short since November 2017, after betting on strength for almost all of last year. Bloomberg said its Dollar Spot Index rose 0.5% Monday after sliding more than 3% in July, the worst monthly performance since January 2018.

Still, prior to the dollar's slump to a two-year low in July, Stephen Jen was bullish. Jen predicted in June that the currency would bounce back as the U.S. economy rebounded. Jen is a pioneer of the so-called dollar smile theory, which posits that the dollar will gain as a result of either U.S. growth exceeding that of other nations or during risk aversion.

Instead, the dollar has languished as rising infections simultaneously put the kibosh on a boost for growth and sapped appetite for the currency as a haven. “The key assumption I was making, which turned out not to be correct, was that the U.S. would sort itself out after a difficult period,” Jen said.

The euro area has only outperformed the U.S. in eight years since 1992, according to IMF data, but 2020 is on that track, as well.

American gross domestic product suffered its deepest quarterly contraction since at least the 1940s in the three months through June. While Europe's economy was also eviscerated, with output shrinking to levels not seen since 2005, recent data show signs of a rebound as lockdowns ease across the region.

Final prints for manufacturing purchasing managers' indexes for the euro-area, Germany and France came above flash estimates on Monday, while readings for Spain and Italy beat expectations. Meanwhile, European governments have — so far — kept a lid on new infections.

That hasn't been lost on the Federal Reserve, with Chairman Jerome Powell saying after the central bank's latest meeting that the path forward for the U.S. economy will largely depend on America's success in “keeping the virus in check.” While policy makers have not explicitly linked rates to controlling COVID-19, the broader effort to curb the pandemic is influencing the outlook for both monetary policy and economic growth.

“I'm much more confident about the 'left' side of the smile: that is, the dollar performing in a risk-off environment, than I am on the other side, which is classically driven by a U.S. economic out-performance,” said Ross Hutchison, investment director for Standard Life Investments.

But others aren't convinced that even this side of the framework holds up. The dollar smile has flattened and turned into a painful “grin,” according to Calvin Tse, a foreign-exchange strategist at Citigroup Inc., with the flood of liquidity unleashed by the Fed diminishing the likelihood of a sudden rush to the dollar in a risk-off scenario.

While Tse doesn't rule out gains for the dollar, any haven rally is likely to be shallower than in previous years thanks to these measures, while the possible extent of depreciation remains the same.

For some, then, it's time to better reflect the influence of the virus in their strategies. Paresh Upadhyaya, money manager at Amundi Pioneer Asset Management, which has $78 billion under management, says accounting for the virus has taken on a bigger role in shaping his view of the dollar and the economy.

To keep tabs on the virus's impact Upadhyaya watches number of items, including activity at airport security checkpoints, restaurant reservations, small business openings, small business revenue and employment. He also tracks traditional data on manufacturing and services, and uses mobility data produced by Apple Inc. and Google parent Alphabet Inc. to gauge states reopening.

“As cases in the U.S. have picked up, that's a flag for the dollar,” Upadhyaya said. “So, we use currency values to gauge which region is having a better handle over the virus.”

So, we will see. A weaker dollar is seen by many exporters as a powerful stimulus to sales, so the current trend will be welcome in some quarters. Still, efforts to fight the virus while managing a volatile economy are a growing challenge with longer-term economic implications — fights producers should watch closely as they persist, Washington Insider believes.

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