Drama In Washington Adds To Dollar Woes

The US dollar has drifted lower against most of the major currencies as the culmination of news from Washington, escalating already rising concerns about the economic agenda that was to bolster growth with dramatic tax reform, infrastructure initiative, and re-orienting trade. 

The political morass that has engulfed the Trump Administration is a major distraction at the same time that the investors had grown more concerned about the momentum of the US economy following the recent disappointment with retail sales, housing starts, and consumer prices. 

We have consistently argued that interest rates are the critical driver of the US dollar. The US 10-year yield reached 2.42% a week ago. It is now below 2.30%. The two-year note yield, which ought to be anchored by Fed policy, has fallen 10 bp to 1.26%. The market appears to be gradually reconsidering a Fed hike in June. Bloomberg, whose calculation for the June meeting always seemed aggressive, has eased to 90% probability form 95% a week ago. In contrast, the CME sees the odds as having fallen from nearly 88% a week ago to a little more than 69% presently. Our own calculation concurs with the CME.  

While the news from Washington is disturbing, we worry that talk of impeachment and the like is grossly exaggerated. Neither sharing intelligence with Russia nor asking the FBI head to consider dropping an investigation are not criminal even if poor politics. Trump’s overall approval rating is low, but there are two aspects that many might not appreciate. First, Trump’s approval rating, but some measures, appears slightly higher than when he was initially elected. Second, his approval rating among his supporters and Republicans remains high. In the past, when other presidents have gotten into trouble, the withdrawal of support from their own party was critical.   

Claims that American democracy is ending are also wildly hyperbolic. As Bismarck famously quipped, in a democracy one should not see the way laws or sausages are made seems apropos. Surely, the republic form of government that has been evolving for more than 240 years is more formidable and resilient than these doomsayers are claiming. It has survived the assassination of presidents, the resignation of Nixon and the Watergate, and the impeachment of Clinton. It has survived the leaking of the Pentagon Papers and Iran-Contra.