A Costly Weakness

In an unfortunate turn of events Global Markets have been shocked and awed by the Power of the Weak Dollar. The weakness of the Greenback has had far reaching consequences across the Pacific and beyond. The Japanese Yen has been in the direct line of fire as Japan took a massive blow in its export numbers while the dollar slipped below 93.63. The situation could get worse for the Yen should the Dollar remain subdued for an extended period of time. Speculations have gripped the Japanese economy with fear that the Fed would stick to its dovish stance and possibly stick to a single rate hike in 2016.

A Global Tug Of War

While Milan based JCI Capital remains long on the Dollar, Alessandro Balsotti who is one of the fund managers at the firm warns against the risk of intervention by the Bank of Japan if the Yen falls below 100. The Dollar weakness has kept global economies on the edge even as it blew hot and cold. While a strong Dollar is a threat to the growth scenario in emerging economies like India, its weakness adversely impacts deflated economies like Europe and Japan. In the midst of confusion, traders have paused to ponder whether the G20 meeting held in Shanghai has woken up central bankers who so long seemed to be oblivious of the hazards of currency devaluation. The outcome of the meet has failed to convince the market that the Fed will hike rates anytime this year. ECB president Mario Draghi with all his efforts has not been able to find the right mix to put the European economy back on the growth trajectory. Even the Bank of Japan has been forced to wade into murky waters thereby biting into the negative interest rate pie.

Strategists however suggest that the weakness of the dollar is not limited to Yellen’s “wait- and - see” strategy, yet the way the dollar has fallen following her dovish stance suggests that she is in command. Simply put the dollar is at the epicenter of a global tug of war.

The Trump Card

A shift in the US political framework could soon spur a surge in the currency if Republican Candidate Donald Trump is elected to power. Historical records suggest that Republicans have been more hawkish than the Democrats. In a recent interview given to Fortune, Donald Trump was quoted saying “Lower interest were unfair to savers” later he changed his stance and said raising rates or strengthening the Dollar would act against the US economy. The Republican candidate from Queens New York has been hitting hard against the US membership of the WTO and the North American Free Trade Agreement, which he says have cost the US significant loss of jobs. Statistics suggest that a fall in the trade deficit number would help curb the outflow of the Dollar from the US thus increase the overall value of the greenback. The scenario looks rosy on paper; however in reality it might turn out to be detrimental for the United States who are net debtors at the current moment. Truth be told, foreign investors own more US assets than US investors who own foreign assets.

The currency has found solace this week after the comments of two Fed Presidents said that a rate increase could be on the cards sooner rather than later. The Fed however is likely to hold their fire until the Brexit referendum clarifies that the Euro zone is more united than divided.

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