Trump trade faded. Are there chances for USD recovery?

The Trump trade remains on the ropes after Donald Trump failed to repeal the affordable Care Act (dubbed Obamacare). It was the first attempt of the new administration to reform the government and its miserable failure shows that Trump might not be able to deliver on his election pledges. And without expansionary fiscal policies (tax cuts and government spending on the US economic development), the US dollar doesn’t justify its recent extreme valuation.

The USD slumped to its lowest levels since November 2016 in the end of the past week. The Dollar Spot Index tumbled to 99 last seen in the last year US election time. US 10-year bond yield dropped to 2.347 from its March high (2.630) remaining in the elevated range that we saw in the middle of November.

Trump’s stimulus policies were expected to provide an additional economic boost to the US economy which would, in turn, lead to higher interest rates and a strong dollar. Now, market participants have become less certain in Trump’s ability to fulfill his pre-election pledges.

Some analysts, however, saved their faith in Trump. They believe that it is too soon to write the USD rally off as other Trump’s legislation proposals meet less controversies in the Congress, and therefore, might be pushed through. According to them, downward pressure must ease in the near term.

The British pound and the yen can become the first two major targets for the USD to gain. The pound is seen to weaken further as soon as Theresa May triggers Article 50 and liberates the UK from its obligations before the EU.

The next victim for revenge will probably be the euro. Although EUR is currently passing through the bullish phase due to anti-EU Le Pen languishing in polls and upbeat economic figures coming out of Eurozone countries, it shouldn’t last long. As we approach the French presidential election with which many anticipate heightened political risks, the euro will likely weaken against the greenback.

The US dollar can strengthen against such risk-sensitive currencies such as AUD and NZD, especially if Trump manages to implement its border tax policy.

From all that has been said above, we may draw the following conclusion: although USD has suffered significant losses in the recent days, there are still chances for reversal in the near term.

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Anastasia Mileshkina