USD: Too much baggage – ING

Weekend press reports and TV interviews suggest US President Donald Trump is not yet ready to be swayed from his mission to reset the global trading system. Asian equities are off 6-10%, and this global trade war is proving the great leveller for global interest rates, where market interest rates are converging lower. Very much in focus is the Federal Reserve. The market now prices 110bp of Fed cuts this year and a low point for the easing cycle down at 3.00% next year, ING's FX analyst Chris Turner notes.

USD remains fragile and a 102-103 range

"The ongoing carnage in equity markets continues to favour defensive positioning. Liquidity is important here, but so is the balance of payments (BoP) picture in that your country does not want to be heavily dependent on foreign capital. Here, the dollar gets marked down on its 4% current account deficit and the view that foreign investors will pull capital or certainly raise FX hedge ratios on longer-term/stickier investments in the US. As to whether Washington policy is triggering a 'sell America' mentality, there are no clear signs of that yet."

"We are also watching to see whether, as one of our traders puts it, this political crisis turns into a financial crisis. For example, US high yield credit spreads are widening sharply, and there's a risk some skeletons are discovered in the financial closet. To that end, keep close watch of the EUR/USD three-month cross-currency basis swap. Any sharp widening in favour of the USD would be a sign of trouble and could briefly send the dollar higher before the Fed is forced to step in."

"In general, expect the JPY and CHF to be favoured, EM currencies and commodity FX to be hit hard and probably the dollar to trade somewhere in between. DXY is heavily weighted towards Europe – a loser in a trade war. The yen only has a 14% weight. Overall, we think the dollar remains fragile and a 102-103 range may ultimately resolve in a breakdown to 100 – either if the Fed comes on board with easing or a 'sell America' mentality emerges. The wild card is the USD funding story."