US Dollar Rallies As Investors Renew Risk Appetite

The US dollar is rallying against a handful of competing currencies on Tuesday as investors have renewed their appetite for risk. With the US-China trade situation deescalating in recent days, traders have resuscitated their interest in the greenback, though financial markets remain in the red. Modest gains in housing data also lifted the buck.

Investors were relieved when President Donald Trump confirmed that his team of negotiators will sit down with Chinese trade representatives in the near term. Although there is a dispute as to who initiated contact first, investors are confident that US and Chinese officials will return to the negotiating table to discuss a trade deal. This is the consensus after Washington and Japan reached a surprise trade agreement so fast as many analysts anticipated a long drawn out affair.
Will that result in a trade agreement? Investors have heard the same thing repeatedly for the past year, so they are just taking a wait and see approach right now. In the meantime, however, traders do have an interest in the US dollar, particularly as other currencies seem less promising.
But markets have shifted their attention to the inversion of the US two-year and 10-year yield curve. There is a growing belief that this could signal a recession within the next two years. This happened earlier this month, but skeptics say that the latest yield curve inversion might not signal a downturn because of how much central banks have distorted the bond market through quantitative easing.
Months before stepping down from his post, Bank of England (BOE) Governor Mark Carney outlined a concept that would radically transform the global financial system and end the dollar as the world reserve currency.
Speaking at the Jackson Hole symposium, Carney suggested that a new international economy would replace the greenback with a virtual currency similar to Facebook’s Libra. He contended that trade disputes and threats of currency wars are hurting economic growth and diminishing multilateral cooperation. Although he agreed that central banks have to handle the situation now, Carney believes that accepting “the status quo is misguided.”

The combination of heightened economic policy uncertainty, outright protectionism and concerns that further, negative shocks could not be adequately offset because of limited policy space is exacerbating the disinflationary bias in the global economy. What then must be done?

In the longer term, we need to change the game. When change comes, it shouldn’t be to swap one currency hegemon for another.

On the data front, the S&P/Case-Shiller Home Price index in June rose 0.3%, down from a 0.6% gain in May. The Federal Housing Finance Agency (FHFA)’s House Price Index edged up 0.2% in June, unchanged from the previous month. On Wednesday, mortgage applications and the 30-year mortgage rate will be released.
The US Dollar Index dipped 0.1% to 97.98, from an opening of 98.05.
The USD/CAD currency pair advanced 0.23% to 1.3286, from an opening of 1.3257, at 18:40 GMT on Tuesday. The GBP/USD surged 0.61% to 1.2294, from an opening of 1.2225.

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