Currencies: Why a ‘Teflon’-coated U.S. dollar refuses to lose its luster

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With the Federal Reserve in easing mode and the U.S. Congress bogged down amid an impeachment probe into the actions of President Donald Trump, the U.S. dollar’s march higher should soon be brought to a halt, right?

Think again, said Chris Turner, head of foreign exchange strategy at ING Bank, in a Monday note with the title: “The Teflon Dollar.”

Related: Why the U.S. dollar is cementing its role as a global safe haven

In it, he notes that despite the aforementioned challenges, the U.S. currency, on a trade-weighted basis, remains near the highs of the year.


“The reason for the dollar’s resilience is the lack of attractive alternatives,” he wrote, noting that’s going to remain unwelcome news in Washington and elsewhere in dollar-land since “in a world of secular stagnation, no one wants a stronger currency right now.”

Indeed, a strong dollar can be a headwind for U.S. companies that derive a big chunk of sales overseas. And Trump has made no secret of his ire over the weakness of other currencies relative to the dollar. Trump even got into a scrap earlier this year with European Central Bank President Mario Draghi over the weakness of the euro EURUSD, +0.0364%, while often referring to the dollar’s strength when bashing the Federal Reserve and his handpicked chairman, Jerome Powell, for not cutting rates more aggressively.

But “deep challenges” facing policy makers in Europe and Asia “now mean that it will be Washington’s job to get the dollar weaker — either through trade conciliation or the Fed shifting to a full-on easing cycle,” Turner said. “Neither of those outcomes look immediate, meaning that the risk environment could well deteriorate into year-end.”

That would also be good news for the Japanese yen, he said, a traditional haven.

As for the euro, its likely to languish in the $1.05 – $1.10 range versus the dollar into year-end as Europe’s slowdown broadens from the manufacturing sector into services and the ECB resumes its bond purchases. Meanwhile, the prospect of a further extension the U.K.’s current Oct. 31 deadline for leaving the European Union could weaken the British pound GBPUSD, -0.1622% by another 5%, Turner said.

The ICE U.S. Dollar Index DXY, +0.08%, a non-trade-weighted measure of the U.S. currency against a basket of six major rivals, has given back some ground this month, pulling back around 0.6% so far in October. But it remains up 2.7% for the year to date and around 3.3% over the last 12 months after hitting a more-than-two-year high on Oct. 1.

Stocks continue to trade within hailing distance of all-time highs, with the S&P 500 SPX, -0.05% rising nearly 18% so far this year and the Dow Jones Industrial Average DJIA, -0.05%, up 14%. That marks a rebound, however, from a steep fourth-quarter selloff last year. Over the longer run, stocks have moved relatively sideways.