The Dollar's underlying trend resumes - BBH

Analysts at Brown Brothers Harriman explained that for the last several weeks, they have been looking for the dollar correction that began around the Fed's rate hike in the middle of December to be completed and for the uptrend to resume.  

"The precise timing of the turn is difficult to get right, but our view is anchored by our macroeconomic assessment and understanding of the key drivers.  

Our technical work suggests the dollar indeed has been carving out a bottom, and we expect the uptrend to resume.  Our confidence would be raised if we saw confirmation in other markets. For example, the Fed funds futures imply (slightly) less of a chance of a hike in March and June from a week ago.  It would also be helpful if the next string of data (CPI, retail sales, and industrial output) would be stronger than expected, as the median forecasts are all for softer numbers.   

We suggest a few considerations helped solidify the dollar's bid.  First, regardless of some disappointing data (wage growth, January auto sales, the first estimate of Q4 GDP), the Fed officials that spoke still seemed confident in the economy and the appropriateness of a gradual increase in interest rates.  Second, it seems as if Trump's talking the dollar down was not the start of some campaign but likely his blustering style.  He reportedly asked the National Security Adviser about whether it is a weak or stronger dollar that is best for America.  He also indicated that the issue of currency manipulation was not high on the agenda as he met with Japan's Prime Minister Abe.   

Third, Trump's tweets and off-hand comments may be losing their sting.  We see what happened to the shares of the retailer who dared to discount his daughter's line of clothes.  The Mexican peso had fallen sharply but since January 19 is the strongest currency in the world, gaining 7.8% against the US dollar.  Fourth, the President seemed to moderate his whack-a-mole approach to policy last week  He signaled that he would honor the US commitment to the one-China policy.  He made some overtures toward NATO.  He maintained continuity with the US stance toward Greek debt forgiveness.  He warned Israel that the construction on the West Bank was not helpful.   

Finally, Trump reaffirmed the campaign's commitment to lower taxes. A major proposal is said to be a few weeks away. Trump says it will be "phenomenal." This is important.  Some economists think that lower corporate tax rates will boost investment and the growth potential, and strengthen the dollar.  Other economists, including the elder statesmen Martin Feldstein, have argued that a 20% tax on imports will hit most the dollar by 25% automatically."