US Dollar Biased Higher as Markets Navigate Trade War Worries

US DOLLAR FUNDAMENTAL FORECAST: BULLISH

• US Dollar rally hits roadblock amid seesawing sentiment trends
• Global trade tensions set to preoccupy markets in the week ahead
• Risk-on, -off extremes may prove to be equally USD-supportive

See our quarterly US Dollar forecast to learn what will drive prices through mid-year!

Last week marked the largest setback in the US Dollar’s march higher from mid-April lows to an 11-month high. The benchmark currency swung higher amid worries about political instability in Italy and Spain only to seesaw in the opposite direction mid-week as risk appetite recovered. Rome took a step back from the brink and Spain seemed to manage a relatively orderly removal of long-serving Prime Minister Mariano Rajoy.

The markets were also surprisingly sanguine about a US decision to allow steel and aluminum tariff exemptions for Canada, Mexico and the EUto lapse. The target countries – all of them staunch US allies – swiftly announced retaliatory measures. Perhaps investors saw the move as a characteristic attempt by President Trump to throw his weight around in a negotiation, and thus as inherently temporary.

The week ahead ought to demonstrate whether this rosy interpretation will hold up. A lull in top-tier economic data flow will put trade talks front and center. Commerce Secretary Wilbur Ross will travel to China, Japan’s Prime Minister Shinzo Abe will visit the White House, and G7 leaders will gather for a summit in Canada. A gathering of the group’s finance ministers last week was reportedly a tense affair.

This promises to tie price action to incoming headline flow as traders weigh up soundbites to gauge whether Mr Trump’s aggressive posture will make for settlement or escalation. A sense of the latter is likely to sour sentiment and bolster haven demand for the greenback. The currency may see near-term losses if the former is the case, but these might be short-lived as the risk-on puts Fed rate hike prospects back in focus.

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--- Written by Ilya Spivak, Sr. Currency Strategist for DailyFX.com

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