President Trump said on Wednesday that the dollar was “getting too strong” and would eventually hurt the U.S. economy, while admitting he would like to see interest rates stay low, the Wall Street Journal reported.
“I think our dollar is getting too strong, and partially that’s my fault because people have confidence in me. But that’s hurting — that will hurt ultimately,” he said.
So, is the dollar really too strong?
Trump may be right in the longer-term view, but incorrect regarding recent price action. The USD index measures the dollar against a basket of foreign currencies, weighted mostly towards the Euro (57.6% weight). The other currencies are the Japanese Yen, Pound Sterling, Canadian Dollar Swedish Krona and Swiss Franc.
The USD index broke out in late 2014, after several years of sideways trading. It rocketed from under 80 to 100 in just over six months. But the dollar index failed to break through resistance at the 100 level and has traded mostly sideways over the past few years.
There was a breakout attempt in late 2016 and the index finally did penetrate the 100 resistance barrier. However, this move was short-lived and the dollar has been in a downtrend since the start of 2017. Highlighted with red lines, you can see the dollar has made lower lows and lower highs since climbing above 103. One more slide back towards the bottom red line and the index is likely to remain below 100. In fact, this next move lower could force the USD index below the longer-term uptrend line, which would be very bearish for the dollar.
It is hard to know how much influence President Trump and his economic team can exert on the dollar if they believe it is too strong. The Federal Reserve sets interest rates and is supposedly independent from the will of politicians. Raising interest rates and reducing their balance sheet should make the dollar stronger, so the FED is working in opposition to Trump’s stated desire for a weaker dollar. But assuming that he holds some sway or bargaining chips with the FED, Trump may be able to slow their pace of rate hikes or encourage other shifts to keep the dollar from climbing higher.
Of course, this news is bullish for gold. Furthermore, Trump’s comments come the day after gold broke out above key technical resistance and established a new 2017 high above the 200-day moving average. This should add momentum to the upswing in precious metals.
The move above $1,260 (200-day MA) was significant and gold is now targeting prior resistance just above $1,300. However, the RSI momentum indicator is very close to crossing into overbought territory. I would not be surprised to see a small pullback and consolidation before making a run at $1,300. But either way, I believe the gold price is headed much higher between now and year end. In fact, I think any move about $1,300 will be followed by a quick shot higher to test the 2016 high at $1,375. If this occurs, suddenly my forecast of $1,500 gold by the end of 2017 does not seem so far fetched.
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