Elias Haddad on Dollar Decline, US Trade Policy, and Fed's Wait-and-See Approach

Dollar Decline and Loss of Confidence

• 📉 The US dollar has fallen approximately 6% since the start of the second quarter, reflecting a loss of confidence in US trade security and fiscal policy.
• ⚠️ This decline is partly due to policy uncertainty, evidenced by a divergence between the dollar index and rate differentials.

Impact of US Protectionist Trade Policies

• 📊 US protectionist trade policies are a significant drag on the dollar for three key reasons:
  • Higher tariffs: The average effective tariff rate has surged from 2% to 18%, posing a downside risk to growth and an upside risk to inflation, which is bearish for the dollar.
  • Ongoing trade war: This threatens to accelerate the declining role of the dollar as a primary reserve currency.
  • Narrowing trade deficit: Policies aimed at reducing the trade deficit result in less US dollar flowing overseas, leading to fewer dollars returning to US securities.
• 💼 Consequently, there's a bearish outlook on the US dollar due to these trade-related factors.

Federal Reserve's Stance and Market Reaction

• ⏸️ The latest FOMC minutes confirmed no new policy insights, indicating a wait-and-see approach from the Federal Reserve.
• 📅 While a couple of participants were open to a July rate cut, the bulk of participants expect no policy changes this year, aligning with the Fed's dot plots.
• 📈 The dot plots suggest 50 basis points of easing in 2025, but with a less dovish distribution, as more participants favored no change for the current year.
• 🗣️ A concern is that the Fed's patient approach to easing might be overshadowed by political pressure to cut rates, which could negatively impact the US dollar.