ING: U.S. Dollar to Remain Supported as Markets for a Fed Rate Cut are Misplaced

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- USD to remain supported despite uneven data

- Regional surveys remain relatively robust

- Trade war has no ill effects; Fed revising up growth

The U.S. Dollar is likely to be supported as regional business surveys remain resilient and U.S.-Sino trade war does not yet appear to warrant a Dollar weakening interest rate cut at the U.S. Federal Reserve say analysts at ING Bank.

Markets are currently expecting the Federal Reserve to cut rates by 0.25% to 2.25% in 2019, which could be holding the U.S. currency back somewhat.

Interest rates drive currencies: when they are lowered it usually weakens the local currency as it reduces net foreign capital inflows.

However, ING argue a cut is unwarranted, pointing to regional resilience, which they say will keep the Fed on hold.

“This in our view still makes the odds of a Fed rate cut this year unjustified (the market is pricing in a full 25 basis point rate cut for 2019). The lack of urgency to ease policy was also suggested by Fed speakers overnight (Robert Kaplan and Loretta Mester). This, in turn, points to a resilient Dollar,” says Petr Krpata, a FX strategist at ING Bank in London.

This is not the only reason ING are pro-Dollar, they also regard the trade war as benign in relation to both its immediate impact via risk markets, which if anything is probably positive, and, more importantly, because of its zero impact on U.S. growth expectations.

“This trade war certainly hasn’t hurt the dollar so far and last night’s release of the FOMC minutes actually saw FOMC upgrading their US growth forecasts,” says Christ Turner, chief FX strategist at ING.

Recent GDP estimates for Q1 appear to support the view that the trade war is unlikely to crimp growth. The trade element of GDP was actually the largest contributor to growth as net U.S. exports rose in the quarter, partly due to a fall in Chinese imports because of tariffs.

Economists, however, point to second round effects from tariffs eventually pulling U.S. growth down such as rising shop prices reducing spending by U.S. consumers.

Whilst this is highly likely and will, no doubt, cause a slowdown, the impact in the short-term, at least, has substantially been absorbed by the rise in the USD/CNY rate, which will have removed some of the tariff premium via a weaker Yuan.

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