Why One Trader Thinks Trade War Will Send The Dollar Tumbling

According to conventional wisdom, trade wars are bullish for the dollar, for two main reasons: they tend to be inflationary (import prices spike), and they impact risk assets, resulting in a flight for USD-denominated safety. Indeed, just today, Bloomberg writes that for dollar bulls, Trump's trade wars are just what the doctor ordered.

They see the greenback as a better haven than gold should the tariff tit-for-tat intensify. Four months after the U.S. president shocked equity markets with his vision of higher duties on imports to America, investors are discovering catalysts that should help the nation’s currency withstand trade turbulence better than gold.

“The dollar has become the main destination for safe-haven investors,” Ole Hansen, head of commodity strategy at Saxo Bank A/S, said by email from Copenhagen. “Geopolitical risk is on the rise, bonds and stocks have sold off and yet gold continues to drift lower.”

A “significant” driver of the dollar’s gains this year has been reduced risk appetite, spurring a tide of capital to dollar assets as emerging markets seize up, according to Jane Foley, head of currency strategy at Rabobank. That said, “the sheer liquidity associated with the dollar means that for some investors it will always be a safe haven,” she wrote in a recent note.

There is another reason why traditional economic theory would suggest the dollar should gain: the prospect that import tariffs will reduce the US current-account deficit even as the Fed hikes rates, thereby creating a rare opportunity in which the dollar can be used both as a haven and in carry trades, according to Andreas Steno Larsen, a global currency strategist at Nordea Bank AB in Copenhagen.

But is that really true? According to Bloomberg macro commentator and former Lehman trader Mark Cudmore, not only are trade wars imminently dollar negative, but in a note overnight, he writes that the dollar is set for an imminent slide on what he calls "flawed tariff logic."

Specifically, he envisions two key things: positioning and the yield effect. On the first, last Friday we showed that after being very bearish on the dollar for the better part of a year, speculators have turned sharply bullish, suggesting there are few shorts left to cover, and the marginal buyers may already be in the trade.

Speculative USD positioning against currencies in the CFTC CoT report, in $ bn

What about yields? as Cudmore writes, "they topped out in mid-May and have been steadily declining since The flattening U.S. curve emphasizes that the more important long-term impact of any tariffs will be the hit to growth U.S.-led trade wars only encourage other countries to divert their trade relationships elsewhere, thereby undermining the dollar’s relevance at the margin."

As a result of the flattening of the TSY curve, the more important long-term impact of any tariffs will be the hit to growth U.S.-led trade wars only encourage other countries to divert their trade relationships elsewhere, thereby undermining the dollar’s relevance at the margin.

So are all those betting on a strong dollar (and weaker yuan), as trade war begin wrong? Read his full note below and decide:

Dollar Set for Imminent Slide on Flawed Tariff Logic:

The outlook for the dollar is increasingly bearish because investor positioning is misaligned with how the trade war will play out in the market.

There’s a stale narrative that trade tensions are bullish for the dollar. This column argued that way back in March, but the dynamics are shifting negatively for the dollar at the margin.

It’s been overlooked that the Bloomberg Dollar Spot Index hit its intraday high two weeks ago and its closing high in the middle of last week.

The argument that tariffs are inflationary, and so will lead to more rate hikes, is a very poor reason to be already long the dollar.

Any price effects will take time to feed through to consumers and much of the impact will be felt long before there’s any effect on the CPI basket of goods.

For further evidence of the flaw in the tariffs-equal-inflation-equals- higher-rates-equals-stronger-dollar logic, look no further than U.S. yields themselves. Across the curve, they topped out in mid-May and have been steadily declining since

The flattening U.S. curve emphasizes that the more important long-term impact of any tariffs will be the hit to growth U.S.-led trade wars only encourage other countries to divert their trade relationships elsewhere, thereby undermining the dollar’s relevance at the margin.

As the world’s largest economy, the U.S. had the strong hand in the early stages of trade negotiations. But, if it escalates into a sustained trade war, the U.S. position weakens substantially due to its twin deficits. It can’t afford to play such hardball that foreign governments become incentivized to stop funding its largesse.

On the other hand, if trade tensions abate, investors will releverage into EM and risk assets, which will result in a de facto selling of the world’s reserve currency.

Why would fresh investors buy the dollar now? A hawkish Fed and the initial tariffs are priced. Whichever way things develop from here, it’s much more likely to be a dollar-bearish world.


Iskiab swmnguy Thu, 07/05/2018 - 14:20 Permalink

Default is worse than repaying a debt indefinitely, look at Argentina.  They had some crazy shit happen to them like having a destroyer seized as a government asset while ina foreign port.

If they could default without repercussions I’m sure countries would, but all the hedge funds holding that debt band together and try to make life worse for the country to discourage future defaults.  Things like food shortages are not possible in a free market in economic theory, I don’t think it’s coincidence that they started following Argentina trying to renegotiate their debt.

Back to the article, I disagree with what he’s thinking.  He might be right in the long run, but as long as the US keeps jacking rates to force a recession the dollar will keep rising.

In reply to by swmnguy

JIMSJOE2 TeethVillage88s Thu, 07/05/2018 - 08:57 Permalink

I agree as a strong dollar actually hurts the US economy along with the rest of the planet. As Martin has stated before, too strong of a dollar collapses everything around the planet as the world's financial systems is dependent on dollars and treasuries. We are again starting to see dollar shortages in foreign markets which happened from August of 2016 to almost the end of the year as capital was being converted from euros to dollars and dollar based assets like the Dow mostly from Europe. We are headed that way again as Europe collapses which picks up steam late in 2018 and the shit hits the fan there in 2021. Of course this has caused enormous problems for the FED and treasury as they have been desperate to create dollar weakness. As a matter of fact they have been attempting this since the 80's when US officials met with Armstrong and wanted to know how to remove the dollar as THE world's reserve currency. His response was you can't as there is nothing to replace it which is the problem Yellen had and now Powell. The US's attempt of Europe going to a single currency to help weaken the dollar has now completely failed.

    Now with Juncker and Macron pushing for debts to be consolidated and guaranteed by all EU member countries Germany could be on the brink of more political turmoil. Merkel is a globalist and wants the EU to stay afloat and she knows as the two above when the ECB eventually stops buying and/or backstopping the debt rates will go thru the roof with whole economies then collapsing faster than now. It will be interesting if she shoves this down the German people's throat as she did with the migrants. Another angle is that EU officials, (Germany), want a single budget for all EU members controlled and administered by Brussels, (Germany). This would effectively have the Germans control all EU members thru the budget process. In addition Brussels, (Germany) wants to tax directly all EU citizens and businesses. The Germans end up controlling everything there without even firing a shot. It is after all the Germans who have benefited from the single currency at the expense of others especially the PIGS. This way when chaos starts with rising rates it will be German industry going in to those other countries and buying up all the assets for nothing.

    If you control the bailout mechanism as they have, if you control the EU hence the ECB, if you control the currency, and then the budgets of EU members which they have been doing anyway and then direct taxation, The Germans then have total control and you might as well rename the EU to the "Greater Fatherland!"

In reply to by TeethVillage88s

Quantify JIMSJOE2 Thu, 07/05/2018 - 09:23 Permalink

A weak dollar will encourage manufacturing to return to the U.S. as foreign made products will be more expensive. It will make manufacturing a much better prospect here. Especially if there are large transport costs and possibly tariffs for those products. Yes Germans will be hurt by making the manufacturing process equal.

In reply to by JIMSJOE2

swmnguy Quantify Thu, 07/05/2018 - 12:30 Permalink

When we talk about manufacturing leaving the US, we're usually talking about things that used to be made in the US, now being manufactured in Mexico and China under control of the US corporations that used to operate in the US as manufacturers, but now operate as importers, having outsourced and offshored all the manufacturing operation.

US companies didn't get "tricked" into doing this, as the current narrative goes.  They did it because the median US manufacturing worker makes about $40,000 per year and that's not a lavish living in the US; but the media Chinese or Mexican manufacturing worker makes about $8,000 per year.  US companies cut their labor costs by about 80%.

US companies impoverished not just their former workers, but their current consumers, because they're the same people.  So US companies cosmetically improved their profit picture dramatically--but only in the short term.  And what are they doing with their windfall?  They didn't cut prices.  They aren't making capital investments.  They're buying back their stock, which rewards major shareholders and executives with earnings-per-share clauses.  It also artificially props up the stock market, allowing the fiction that the US economy is booming.  Meanwhile, the US work force which used to be rooted in manufacturing is now predominately employed in low-wage, dead-end service jobs.

For manufacturing to return in a big way to the US, American workers have to be able to live on the equivalent of $8,000 per year in purchasing power.  This can happen in a number of ways combining to produce the effect; tariffs, inflation, subsidies; but the math is simple and unavoidable.

Watch America's working class take a functional 80% pay cut and we'll see how that plays out.

In reply to by Quantify

Dilluminati I am a Man I a… Thu, 07/05/2018 - 08:07 Permalink

When you look at the actual return of the treasury it is higher than the S&P 


That has lifted the yield of three-month Treasury bills to a 10-year high of 1.8995 per cent on Friday, according to Bloomberg data. At the same time, the trailing dividend yield of the S&P 500 stock market index has dipped slightly from the roughly 2 per cent mark it has traded around in recent years, to 1.8959 per cent. 

And here is the real kicker..

too many debts chasing too few (denomination -dollar) = deflation

So I read these oddball economic theories and think aside from the 2006 gold bubble what would make someone imagine that Gold ad Silver are suddenly moving again?  I don't see the bid, greater fool, or money within circulation to sustain crypto which was an equally absurd proposition if you stayed in that past the euphoria and pump and dump stage. 


In reply to by I am a Man I a…

rwe2late Thu, 07/05/2018 - 10:56 Permalink

The petrodollar uber alles!

[The longer-term goals trump any short-term vagaries of the currency market]

Subjugating Iran is a key to keeping China and Russia down, by blocking the 'one-belt' trade route and by denying a major energy resource.

Israel and Saudi Arabia will be used as little attack dogs to provoke and cripple Iran.

Sanctions, tariffs, military threats are meant to weaken Russia and China and Iran. Yes those policies have costs, but there is also profit to the MIC, to banksters, and to politicians who curry xenophobia and jingoism.

Secondary sanctions will be imposed to thwart Chinese and Russian trade with Iran.

Regardless whether based in the USA or in Europe or elsewhere, the global corporations and financiers have a confluence of interests. And their chief collective interest is to gain control of global markets and resources. The politicians in the USA and Europe will hardly forget the crime families and corporate racketeers who sponsor them.

Chinese and Russian oligarchs and businesses  that are invested in trade with the 'West' will tend to favor acceptance of 'Western' demands.

Will the USA offer some (illusory or short-term) advantages to persuade Russia to turn away from Iran and China? Or will the USA continue to employ just the stick in an attempt to debilitate China's main ally?


Roacheforque Thu, 07/05/2018 - 11:53 Permalink

In our derivative world, perceptions are inconsistent because cause and effect are cognitively dissonant. Is a trade war good for the dollar or bad for it? Or is there just an equal offset? Is Trump masterful or clueless? Something in between?

We hear the simplest to the most complex arguments for every possibility, as well as lies and propaganda designed to create an alternate reality.