US Dollar Gains Traction As Trade Situation Improves
The trade tensions between the U.S. and China, as well as the U.S. and Mexico, have negatively affected the USD's performance, especially last week when the currency's value took a hit. Nevertheless, things kicked off on a positive note this week as the tensions in global trade cool down.
The US dollar surged on Monday, and those gains reflected on the US dollar index, which surged 96.871 by 08:17 GMT, thus registering a 0.3% gain. The gain was however slight considering that the index fell by 1.2% a week ago. The last time that the index demonstrated such a performance weekly was in February last year.
U.S.- Mexico border agreement raises hope
The USD’s performance improved on Monday after it was announced that Mexico and the U.S. agreed to a migration deal towards the end of last week. This deal was, however, reached after US President Donald Trump threatened to hit Mexico with higher import tariffs if Mexico failed to implement tighter border control.
Data released on Monday showed that there was noteworthy growth in Chinese exports even though the country was slapped with high tariffs by the U.S.
However, analysts believe that the growth was due to shipment front-loading to circumvent the tariffs. Traders are still concerned about the negative impact of the prolonged trade war between China and the U.S.
A group comprised of 20 of the top players in the finance industry called for the two countries to come up with a deal. They noted that the ongoing trade tensions between the two countries have negatively affected global growth.
Traders that have previously been using the greenback as a haven currency have now been forced to take a more cautious approach. This includes looking for alternative safe havens such as the Japanese Yen which surged in May as the global trade situation continued to worsen.
Japan is considered the biggest creditor in the world, and so the Yen usually gains when there is financial or geopolitical tension.
State Street Bank branch manager Bart Wakabayashi believes that the recent border deal between Mexico and the U.S. will have a positive impact on trade in China. He believes that the optimism raised by the deal will likely fuel positive sentiments in China.
"We've had trade talks with the EU, with Japan. Hopefully, these will start to turn to the positive narrative which should see further dollar weakness in the Yen," stated Wakabayashi.
Traders and market expert anticipate interest rate changes
The US dollar’s performance has so far been held back by the growing speculation that the Federal Reserve plans to slash interest rates before the end of 2019. The USD was further held back by an underwhelming employment report on Friday which revealed that the number of jobs in May fell short of the expected 75,000 jobs.
The report indicates that economic activity has been declining and the labor market is experiencing the trickledown effect.
This loss of momentum is arguably due to the ongoing trade tensions fueled by the China-U.S. trade war. The US dollar is now facing the effects of the trade war, and market experts expect the Federal Reserve to start taking corrective measures within the second half of 2019.