US Dollar Squeezed after Mueller Win Renders Midterms Even More Crucial to Outlook

-USD left bruised by Mueller's Manafort conviction, Cohen's plea.

-Mueller returns market focus to a USD-negative Trump impeachment.

-November midterms are now even more crucial to the US Dollar outlook.

© Gage Skidmore

The US Dollar rose a fraction during early trading, placing the Pound and Euro under pressure, although the move was not enough to offset losses wracked up overnight when two of President Donald Trump's former allies met the long arm of the law over campaign finance violations.

Former campaign manager Paul Manafort was convicted of a series of campaign finance violations while President Trump's former attorney, Michael Cohen, also pleaded guilty to similar charges. 

Wednesday's twist comes after a year-long investigation by special prosecutor Robert Mueller, which sought to uncover evidence of alleged-collusion between the Trump presidential campaign and the Russian state. 

And with Trump's tax reforms having got the US economy firing on all cylinders earlier this year, and pushed up the Dollar over recent months, the in-court developments were always going to be bad news for the greenback. 

"It has heightened speculation that President Trump could sack Mueller, although the decision could be could be reversed by the Democrats if they perform well in the mid-term elections," says Derek Halpenny, European head of global markets research at MUFG. "We believe that higher US political uncertainty is likely to provide more of a dampener on further US dollar upside potential in the coming months."

With the November midterm elections less than three months out, the danger for the Dollar is that Wednesday's legal developments lead to increased concern in the market over the possible impeachment of President Trump.

All 435 seats in the House of Representatives will be up for grabs, as well as 35 of the 100 seats in the Senate, in November. A simple House majority is required for Democrats to impeach, although a total of 67 out of 100 votes in the Senate are necessary to determine guilt.

There is a long-established precedent for governing parties to see their majorities whittled down or even lost at the midterms. 

No evidence of collusion has been found by Mueller's investigation although a series of connected individuals have been indicted over unrelated offences. Advocates of impeachment have since turned to a similarly long-lived complaint based on an alleged breach of the foreign and domestic emoluments clause in the US constitution.

The District of Columbia and State of Maryland, both the strongest of Democratic Party heartlands, have sued President Trump in a Maryland court alleging the President is in breach of the constitution because of his Washington hotels' use by domestic and foreign dignatories. The case is ongoing. 

"Trump impeachment noise may just be another reason for speculative investors that are extremely long USD’s to rush to the exit doors. This fresh wave of $ negative news comes at a time when the President has ramped up his verbal jawboning of the currency and US interest rates – while US leading indicators are showing signs of coming off the boil," says Viraj Patel, an FX strategist at ING Group. 

Patel says this makes the Dollar vulnerable to a sharp adjustment in the positioning of traders and that previous "positioning clearouts" have been worth a decline of 5% to 7% in the in the trade-weighted US Dollar index.

The US Dollar index was quoted 0.12% higher at 95.32 during early trading Wednesday although it's down from 95.60 Tuesday afternoon. The index is now up 3% for 2018 after reversing a 4% first-quarter loss.

The Pound-to-Dollar rate was 0.15% lower at 1.2884 and the Euro-to-Dollar rate was 0.09% lower at 1.1565.

Wednesday's price action comes ahead of the release of minutes from the Federal Reserve interest rate meeting from June, although recent events mean the likely impact these will have on the market is quite low. 

A litany of events have taken place since the June meeting that mean any commentary in the minutes is likely to be of little relevance this late in August.

"A proper TRY crisis has developed, the fear of contagion of further EM currencies, a further flattening of the US yield curve and of course the US President’s criticism of the Fed rate hikes has caused a stir for the US dollar. As a result it seems unlikely that today’s minutes will provide any new revelations," says Esther Reichelt, an analyst at Commerzbank. "Of course the focus is on what will happen after the next rate hike planned for September." 

The Fed has raised interest rates seven times since the end of 2015, including twice in 2018, taking the Fed Funds rate range to between 1.75% and 2%. Many economists expect it to raise rates so the top end of that range hits 3.25% around the end of 2019.

However, there is now also increased uncertainty over the interest rate outlook after President Trump criticised the Fed for its interest rate rises in a Reuters interview Tuesday. He said he is "not thrilled" the Fed has raised rates twice since Trump's pick for the chair, Jerome Powell, took the helm in February. 

Changes in rates, or hints of them being in the cards, impact currencies because of the push and pull influence they have on international capital flows and their allure for short-term speculators.

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