US Dollar Becomes the Looming Red Flag for Equities and Bonds
Dollar weakness has put currency and equity markets onto a potential collision course due to the redistributive effects of foreign exchange fluctuations on economic growth and corporate performance.
Weakness in the dollar is largely attributable to the continued accommodative stance of US monetary policy, as well as a growing belief that the Trump Administration is not necessarily committed to a strong currency.
History suggests no consistent relationship between the dollar and US economic expansions, although the attitudes of prior Administrations have seemingly played a significant role in the movement of the exchange rate.
A full-blown currency war of competitive devaluations still looks unlikely due to the risk of significant global financial upheaval and, consequently, major political fallout.
Bullish US profit expectations for 2018 are underpinned by a lower corporate tax rate and an implicit assumption that the US dollar will still be beneficial for corporate earnings.
Any future refusal by foreign exchange markets to trust assurances by the Trump Administration that it supports a strong dollar will be a red flag for US bonds and equities.
DeSaque Macro Research Limited was formed by Said DeSaque in April 2012 with the intention of delivering independent global macro investment insights and new thematic long-term ideas to investors, along with an agnostic opinion of the markets.
Said DeSaque has over 29 years of experience working as a professional economist in financial services, primarily based in London. His working role has involved extensive travel around the world, bringing him into contact with investors of different cultural backgrounds and investment requirements. Prior to establishing DeSaque Macro Research, Said held positions as Senior Economist and Investment Strategist at US banks Robert W Baird and William Blair. He began his career as a graduate at PaineWebber in 1986, where he became Head of the London Economics Department in 1996. This role allowed him to engage with senior investment professionals, alongside regulators and provided a unique perspective of market intelligence at work.
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