How dollar would stack up against other majors in Q4

Dubai - Interest rate environment set for low to negative rates in short-to-medium term

A partial trade agreement between the United States and China have mitigated concerns over a global economic slowdown accelerating but caution continues to dominate sentiment in the financial markets.
In trade-related developments, US President Donald Trump said a "phase one" deal was reached. Investors have welcomed the more positive tone of trade talks with open arms and global stock markets breathed a sigh of relief at the de-escalation of trade tensions.
As the drama unfolds and remains subject to change, investors are watching major central banks such as the US Federal Reserve, Bank of England, Bank of Japan and the European Central Bank.
Every single one of these banking authorities has acknowledged a potentially harmful global slowdown amid escalating trade tensions in Asia, America and Europe. The interest rate environment is set for low to negative rates for the short-to-medium term.
This has resulted in safe-haven buying of the dollar and yen, supporting currency strength even amid lower bond, deposit and borrowing rates in the US and Japan.
At this point, the question is whether the scenario will turn tragic or return to growth and investor confidence. The macro-economic outlook certainly appears uncertain at the time of writing.
Dollar issues: Exports, trade talks, politics
The stronger dollar has had the expected effect of pressuring exports from America to external markets. The US Bureau of Economic Analysis reports that year-on-year exports dropped by $2 billion for the three months ending in August and the import-export deficit soared by $3.2 billion for the same period.
Far from increasing demand for American products, the current protectionist policies are instead reducing sales to foreign markets and further pressuring the economy.
Paradoxically, the dollar's safe-haven attraction amid trade war uncertainty maintains strength versus its peers, making US exports and dollar-denominated commodities like crude Oil more expensive.
Unpredictable trade talks
Much-anticipated trade talks are the next scenario in our economic drama.
The answer to the question about whether the US and China can reach a deal appears to be 'yes' but at the time of writing, those who say 'no' cannot be discounted until the final deal is signed.
At the same time, we should not discount the chance of a final deal being closer than we think because both countries are aware of the economic damages caused by the trade tensions. Trump faces impeachment issues and is seeking ways to improve his ratings ahead of the November 2020 elections. Judging from the latest negotiating signals, Trump's political agenda may lead to a quick deal with China. Expect the dollar and its pegged counterparts to remain at historically-strong levels, but that the dollar will face risks of gradual weakness in the event that investors become confident that the 18-month trade tension drama between US-China can reach a conclusion.
Euro issues: Weak growth in Europe
The most recent manufacturing data from Europe's largest economy, Germany, is a source of concern. In August, new orders in the manufacturing sector fell by 0.6 per cent on a monthly basis, appearing to confirm that the country is on the way to a technical recession after the economy contracted by 0.1 per cent in the second quarter.
The slowdown in Germany can be attributed to the uncertainty caused by trade war tensions between the US and China, in addition to the high stakes and unpredictable course of Brexit.
Euro/dollar is valued around 1.10 at time of writing, but issues with the eurozone economy and the expectation of the central bank in Europe to lower interest rates suggests that the pair can fall as low as 1.06. Therefore, expect for the dollar and its pegged currencies to remain at a strong level against the euro.
Pound issues: Brexit, macroeconomy
Like Germany, the UK's economy continues to be pressured by uncertainty over the outcome of Brexit. The October 31 deadline was accompanied by frenetic last-ditch attempts to reach a deal but the markets are unconvinced while they wait for a definitive result.
The only sure thing is that pound/dollar is vulnerable and sensitive to rapid movements whenever there are negative headlines about a hard Brexit, mostly because of the implications for the UK's already-weakened economy. It would be considered as one of the largest shocks of the century if the United Kingdom does actually exit the European Union with a no-deal Brexit, therefore keep an eye on sudden strength in the Pound lifting the potential for pound/dollar to aim higher - meaning that the dollar and its pegged currencies can weaken against the pound over the medium-term.
Yen and safe-haven buying
The yen remains intermittently supported by safe-haven buying in spite of sluggish growth in Japan. Compared to other developed market currencies, the yen can stand its ground versus the dollar by virtue of Japan being the world's largest creditor. However, in these 'interesting times', even this status may sour if the world's debt keeps rising and returns keep falling amid the global slowdown.
In conclusion, the fate of the world's major developed market currencies depends heavily on a sustainable trade agreement between the US and China. Should the phase one deal lead to a final and comprehensive agreement, it's possible that even the worst effects of a hard Brexit could be mitigated by more buoyant investor sentiment and stronger risk appetite. The alternative is more of the same uncertainty slowly whittling away the strength of the global economy.
The writer is global head of currency strategy and market research at FXTM. Views expressed are his own and do not reflect the newspaper's policy.

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