The Battle of the dollar has commenced.
The forces battling to squash the value of the greenback stretch from Washington to Beijing, with battle lines in Tokyo, London and Shanghai.
A strong dollar is crippling to the Chinese economy, since the yuan is pegged to the dollar and has already been devalued by 10% to keep prices in China from exploding.
The Trump Administration — despite not having Treasury-designate Steve Mnuchin’s Senate vote yet — still has spoke about the need for a weaker dollar to keep their pledge of improving trade exports and creating more jobs here. A strong dollar increases costs for salaries here in the US and raises the costs overseas of American-made products.
The collateral damage in this battle will be the stock market as equities fall on cheaper dollar. A cheaper dollar is inflationary and stocks despise inflation, but its a daily fight so trading will be choppy. I wrote about this earlier this month.
The question is who is on the other side of this trade battling central bankers and their deep pockets?
China and Russia are certainly defending their currencies in the global forex and bond markets. The complicated trades involving US sovereign debt has deep effects in currencies.
Selling Treasuries can cheapen the dollar and the converse is true. Look at yields in the last three weeks in US sovereign, which have dropped with increased buying of the debt.
The battle will continue for most of the year, since the Federal Reserve will not be able to raise rates until Q4 as I said earlier.