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News and Insights

Aura Global Insights – Issue No. 26

 

WEAPONISING THE US DOLLAR

Whilst the US economy continues to show resilience, a few cracks are appearing in the façade with both manufacturing activity and consumer sentiment having declined from multi-year highs.

As highlighted in previous weeks, the US Federal Reserve (Fed) remains caught in the crossfire of the escalating US-China trade tensions. Fed Chair Jerome Powell acknowledged the rise in geopolitical tensions at his recent speech at Jackson Hole, reiterating the central bank’s commitment to “act as appropriate to sustain the expansion.” While the Fed does not want to enable the trade conflicts, it could be forced to ease further to offset the negative impact on the economy.

Whatever the source of business risk, cutting US interest rates enough to steepen the yield curve looks increasingly likely. The effect on borrowing conditions might not move much but the effect on the US dollar could be significant. It is an epic historical anomaly that almost all of the world’s major countries’ sovereign debt trades with a yield below the US overnight risk-free rate.

President Trump is a policy activist and is always keen to take the initiative. He has used most of the available policy levers at his disposal. The conundrum is that Trump can’t raise tariffs more without the likelihood of driving the economy into recession. The policy prescription and lever left is to potentially weaponise the US dollar.

Bottom Line: US Policymakers are approaching a critical juncture with respect to preserving its global economic and geopolitical position. The one thing no one is expecting at this stage is a trade deal and therefore this leaves the real prospect of weaponising the US dollar. The downside risk is that pulling the nuclear trigger may set in motion an ugly currency war and a race to the bottom. For Trump, he may think this is “the only way to save the world” – but then again, he is no Flash Gordon.⚡

If you have any questions please contact one of the team on +61 2 9199 8860 or info@aurawealth.co


This is communication is provided for informational purposes only by Aura Wealth Pty Ltd (AFSL 380552) and is of a general nature only. Accordingly the information provided does not take into account your investment objective, financial situation or needs. You should seek professional advice before making any investment decisions and consider whether the information is appropriate in light of your objectives, financial situation and needs.  The views and opinions expressed in this material are those of the author as of the date indicated and any such views are subject to change at any time based upon market or other conditions. The update may contain certain statements deemed to be forward-looking statements, including statements that address results or developments that Aura expects or anticipates may occur in the future. Any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected in the forward-looking statements. Past performance is not a reliable indicator of future performance.