The yield differential is not the only FX determinant, but it’s a big factor. The US yield is dropping by more than the German yield, and we can suspect that the German yield is influenced by flows out of French paper—and can explode upwards once those elections are over.
Nobody knows if the dollar remains a safe haven currency when its country is the one raising the risk aversion level. The dollar has lost its short-lived upward momentum, in part on the usual pause but also probably renewed jitters over geopolitical concerns—still no coherent policy stance on Syria from the White House and too many unknowns, including N. Korea, Iran and Russia. North Korea said it is prepared for “any mode of war desired by the US” after the US increased the Navy presence in the region. Analysts expect another nuclear weapons test on Saturday, the last leader’s birthday. Secy State Tillerson goes to Russia today and may get snubbed by Putin. No wonder risk aversion bumped up, as seen by the drop in US yields and the rise in gold and VIX.
It’s not hard to make a case for rising yields and the dollar tagging along, given somewhat higher inflation and a resolute Federal Reserve. See the Bloomberg chart—the yield struggles to reach and hold 2.60%, in part because tax reform and infrastructure spending keep getting pushed out into the future. As in foreign affairs, the absence of preparation and planning at the White House are damaging. Go back and look at the euro/dollar chart. The linear regression has not been broken to the downside.
Politics: Trump continues to disclose, every day, an unprepared and inept administration. Confusion reigns about the airstrikes against Syria, starting with constitutional authority. In general, Article 2 allows the president to use the military to defend national interests, but Trump has not even tried to name the national interest in this case. Syria was obviously not a threat to the US itself. In the absence of genuine national interest, the president needs to consult Congress, which is the only arm of government with the authority to declare war. Congressmen screamed because Obama used military force against Libya and an equal number are screaming now about Trump. The key reasons the framers gave war authority to Congress was to ensure a fruitcake president doesn’t act on impulse and to get a full account of the policy intentions behind military action.
Congress has not always behaved well—it took Pearl Harbor to get Congress to allow Roosevelt to declare war—but that impulsive fruitcake/lack of a plan aspect is all too prescient. For all we know, Trump ordered the airstrike solely to impress Chinese Pres Xi and his N. Korean client state. We are certain there is no plan.
Ideally there is a plan and it’s made clear to Congress and the public before the first shot is fired. Here we are a week later and all we have are conflicting statements from the president, Secy of State Tillerson, ambassador to the UN Haley, and national security advisor McMaster, who is probably the only credible party present. But each is saying something different—focus on defeating ISIS only, regime change or regime change maybe later, one-time thing. The press secretary makes the ridiculous claim that these ideas are not mutually exclusive. Well, yes, they are. And all of this blather is 180 degrees from the Trump campaign promise of America First, which the voters fully understood to mean no more military engagements, especially in the Middle East.
By Barbara Rockefeller
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