US protectionism is dollar negative - Danske Bank

According to analysts from Danske Bank, Trump’s trade rhetoric is accelerating the revision of hegemony status of the US Dollar 

Key Quotes: 

“Trump’s accelerating his protectionist agenda is easily reconcilable with his highly fiscal expansionary policies and the talk of the virtues of a weak dollar voiced by Treasury secretary Mnuchin early in the year. While the current mix of fiscal and monetary policy is set to remain USD negative, we further note that the hegemony status of the USD – and hence possibly its safe-haven properties – have been up for revision for a while, and Trump’s trade rhetoric is accelerating that process.”

“Currency-reserve flows take time to shift but a decline in the lure of US assets at a time when the US has to issue more bonds to finance the twin deficits could be critical. In an FX context, we deem that the associated upward pressure on yields will do little to outweigh the negative effects of the current US policies on the USD.”

“In our base case that the Trump administration introduces protectionist measures on a caseby-case basis, we believe the near-term USD weakness trend would abate somewhat, and EUR/USD should stay in the 1.21-1.26 range for now (but still edge higher as the ECB continues its path to ‘normalisation’). In a risk scenario where an actual trade war breaks out, e.g. with the US leaving the WTO, global risk sentiment is likely to take a firm hit and it is less clear whether the traditional safe-haven status of the USD would still be in place and support the dollar. We think however that the associated hit to US growth will dominate any flight to US ‘safety’ in that case, and foresee a weaker USD in that outcome too.”