The Trump rally in the US dollar has been reversed. Against the euro, it has given up all of the 7 per cent gains it made in late 2016.
To see why this should have happened, we need to remember that the €/$ rate has been correlated with the gap between US and German bond yields. Rises in the dollar such as in late 2014 and 2016 have been accompanied by rises in US yields relative to German ones, and falls in the dollar have been accompanied by falls in US yields relative to German ones. This tells us that currency moves are due in part to changes in expectations for growth and interest rates.
In the autumn, investors had hoped that a Trump presidency would mean looser fiscal policy and hence faster growth and higher interest rates – hence the dollar’s strength. These hopes, however, have since receded. Mr Trump doesn’t look strong enough to drive through the sort of fiscal expansion and tax reform investors had hoped. And the US economy seems unable to get above third gear: growth has pootled along at 2-3 per cent and is expected to continue to do so. Meanwhile, the eurozone economy has been surprisingly strong. The dollar has thus weakened as the gap between 10-year yields on Treasuries and German bonds has narrowed.