23.04.201809:00 Forex Analysis & Reviews: Growth of the dollar? Everything is not so obvious

The US dollar finished the week with growth, but the demand for it was circumstantial and was caused by the outcome of investors from China against the growing threat of a full-fledged trade war.

We have repeatedly noted that the strengthening of the dollar is important only in terms of supporting the stability of the global financial system. As for the US economy, a strong dollar for it at this stage is highly undesirable.

The Committee on the Budget of the US Congress (CBO) published in April the next update of the budget and economic forecast for the next decade, taking into account the changes caused by the start of the tax reform. The conclusions of the NWO are very unpleasant - in an optimistic scenario, the accumulated budget deficit will amount to 12.4 trillion, the annual deficit will be twice the average for the last 50 years, and the federal debt will grow to 96.2%.

In this scenario, the assumption is that the increase in taxes and the reduction in costs will occur in accordance with the calculations. If these changes do not occur, then we should expect the growth of the national debt to 105%, and the aggregate deficit - up to 15 trillion.

Thus, even in an optimistic scenario, the budget deficit will increase at a record pace, as the growth rate of spending will exceed revenue growth for the next 10 years - such a scenario is incorporated in the tax reform.

The US is trying to influence the trade balance in a number of ways in which the right direction is for itself, there is a rapidly growing rate of trade protectionism, which began with President Trump.

The attempt to shift some of the responsibility for the inflated level of consumption to their trading partners causes quite obvious opposition. First washing machines, then oil and aluminum, and now the trade war came in a high-tech sector. Two months ago, the United States restricted access of Huawei and ZTE products to the US market, and last week, it completely banned US companies of cooperation with ZTE, effectively imposing sanctions on China under the Russian scenario. China in response, informs the American side about the possibility of prohibiting sales in China of Apple products. Evidently the escalation of unilateral steps will lead to the destruction of patent law and the total trade war of all with all.

We have already noted that the US, in fact, has no other choice but to support a weak dollar, as the growth of the trade-weighted dollar (TWI) rate will inevitably lead to an increase in the trade balance deficit. With such trends, there is no hope of curbing the growth of the budget deficit, but there are other reasons.

According to the IMF forecast, which is confirmed by a number of large banks, global production this year will slow down rapidly.

In the coming quarters, the slowdown in the global business cycle is expected, which will be strengthened by the Fed's policy and at the same time mitigated by Trump's tax reform. The slowdown in global growth will lead to a weakening of real wage growth rate, adding that tightening credit conditions and the risk of escalating a full-fledged trade war is beginning to look almost inevitable, as the battle for markets will become even more fierce.

Thus, a number of fundamental factors objectively contribute to the growth of the dollar index. Comments of Fed officials are mostly hawkish, the market is confident in at least two rate hikes in June and September, that is, the Fed will continue to adhere to its plan, which inevitably contributes to tightening of lending conditions and demand for the dollar. This process will be handled by means of forceful methods, aimed at shifting part of the costs to the shoulders of most US trading partners.

Macroeconomic statistics this week will be of little significance, and until Friday will not have a noticeable impact on the dollar. On Monday and Tuesday, data on the housing market will be published in March, on Thursday - a report on orders for durable goods, which may come out worse than expected amid a slowdown in production activity. On Friday, preliminary data on the GDP growth rate in the first quarter will be released as well as personal spending. The latter factor will be regarded by the market as the main one, yielding worse expectations will contribute to the depreciation of the dollar.

This week, we should expect an increase in demand for safe haven assets, primarily for the Japanese yen. Slower growth in the cost of oil and a decrease in the flow of capital to the stock markets will contribute to heightened tensions, which may lead to a slowdown in the growth of Treasury yields.