Why a bet against the dollar makes sense as trade-war fears fester

Worries about trade tensions dont look like theyre fading away, as a round of trade talks between the U.S. and China ended over the weekend with no agreement.

Meanwhile, finance ministers from Canada, France, Germany, Italy, Japan and the U.K. at a G7 meeting on Saturday issued a rare rebuke to the U.S., expressing their unanimous concern and disappointment about President Donald Trumps decision to place tariffs on metals imports from his major allies.

Read more: China warns trade agreements are off if U.S. imposes tariffs

So what should traders do?

Consider betting against the buck, according to Kevin Muir, a strategist who runs a popular blog called The Macro Tourist that analyzes macroeconomic bets.

It makes sense to once again start leaning short against the U.S. dollar, he wrote in a blog post.

Trump is upset about trade deficits, but the nation with the worlds reserve currency almost by definition runs in the red, said Muir, a market strategist at Toronto-based East West Investment Management.

Therefore if Trump is insistent on eliminating all of Americas trade deficits through protectionist trade policies, he is hastening the abandonment of the U.S. greenback as the worlds reserve currency. This will mean a lower level for the U.S. dollar, he added.

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The ICE U.S. Dollar Index
DXY, -0.42%
has rallied from a severely oversold level around 90, but further gains might be tough to come by, according to Muir, a former RBC trader. He described the recent advance as a counter-trend rally of a couple of months that might be over noting the index largely has been retreating since early 2017.

A little part of me is worried that markets are overlooking some really negative developments, Muir also warned.

Sure, maybe Trump will backtrack on these policies just as quickly as he entered into them. But what if he doesnt?

Go here to read Muirs full post.

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