Forex Analysis & Reviews: Dollar took a break: Pentagon's head opposed Trump, Trump rescued in front of China
time 05.06.2020 11:21 AM
time Relevance up to, 04.06.2020 07:38 PM

The dollar index showed an upward correction after a prolonged decline during the Asian session on Thursday. Considering a wider time range, it can be concluded that the index has been steadily declining since May 25, that is, from last Monday. Therefore, the current situation can only be regarded as a correction. The dollar bulls have no reason to rally - the dollar reacts precisely to the news background, which became more favorable for the currency during Wednesday's evening. However, it's too early to talk about a turning point, given the inconsistency of fundamental factors.

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So, the dollar index has been able to rise from 97.21 to the current level of 97.48 over the past eight hours. This is quite a doubtful "achievement", but here the dynamics and tendency are important. Over the past few days, the dollar has declined amid mass protests and riots in the United States that have become phenomenal. The risk of a second outbreak of coronavirus in the country, as well as the possible use of army forces against protesters, worried investors. In this case, the dollar could not fulfill the role of a protective tool, given the locality of the unfolding events. Therefore, they began to gradually get rid of the dollar, especially against the background of a general risk appetite due to the weakening of quarantine measures in key countries of the world.

But now, the demand for US currency has increased again. This was facilitated, including by American events. In particular, US Secretary of Defense Mark Esper unexpectedly opposed Donald Trump's intentions to attract the army to suppress mass protests. Esper has been in office since last July, and has always been considered the "protege" of the current head of the White House. Therefore, such a move on his part is really surprising, and judging by the reaction of the market, even traders as well. The head of the Pentagon said that the option of attracting regular armed forces should be used "only as a last resort and only in the most urgent and difficult situations." At the same time, he stated that now the country is not in one of these situations.

Here, it is necessary to dig a little into the background of this issue. On the one hand, Trump cannot make a sole decision on the use of army forces against protesters: according to the Posse Comitatus Act, which was adopted in 1878, the armed forces cannot operate inside the country without the permission of Congress. And since many prominent American politicians (including Republicans) opposed this idea, the head of the White House did not even try to take this path. However, America is a country of opportunity, including in the context of legal loopholes, so Trump threatened to use the "Law on Rebellion", which was adopted back in 1807 and has never been put into practice since then. It allows the US president in certain cases to use soldiers to suppress lawlessness and rebellion in the country. And here it is necessary to emphasize that the Minister of defense opposed the application of this legislative norm, reasonably noting that there is no mutiny in the country.

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This fact allowed the dollar to win back part of the lost positions. In addition, American-Chinese relations entered the foreground once again, which turned the attention of traders. But the situation here is controversial. On the one hand, the White House decided to ban flights to the United States for four Chinese airlines. We are talking about major airlines in China – Air China, China Eastern Airlines, China Southern Airlines and Hainan Airlines. Washington's decision is in response to Beijing's actions, which did not allow U.S. air carriers United Airlines and Delta Air Lines to resume flights to China from June 1. The above ban comes into force on June 16, but the White House has made it clear that it is ready for negotiations with the PRC on this issue.

Amid quite tough decisions regarding the largest Chinese air carriers, Trump has taken a surprisingly passive position on the so-called "Hong Kong issue." Let me remind you that the head of the White House announced a list of sanctions steps against China and the Hong Kong administration last Friday, in response to the adoption of a resonant law on national security. He said that Washington will abolish all trade privileges and privileges that Hong Kong enjoyed as autonomy within China. Secondly, the States will introduce targeted sanctions against those officials of the PRC and Hong Kong who are somehow involved in "undermining the autonomy of the region." Thirdly, Washington cancels visas for Chinese students "who may pose a threat to the national security of the country." And fourth, the States, according to Trump, plan to "strengthen the security of US financial markets by identifying and blocking unscrupulous Chinese companies."

Now, a week has passed after the Friday press conference, so the journalists asked the American leader if he really intends to apply sanctions against the Chinese authorities and personally against Chinese President Xi Jinping, but the answer was discouraging - According to Trump, he has not yet considered the issue of imposing restrictions. Literally, his comment was: "I have not thought about this yet."

Such a weak position of the President of the United States made it possible to make the assumption that the States would not aggravate the situation around the "Hong Kong issue", and most importantly (in the context of the currency market) they would not translate the political conflict into an economic plane. This fact also supported the dollar, which strengthened slightly across the entire spectrum of the market during the Asian session on Thursday.

Macroeconomic reports played in favor of the growth of the US currency. In particular, the report from the ADP agency turned out to be much better than forecasts instead of the projected reduction in the number of employees by 9 million, the indicator reached 2.7 million. The ISM composite index for the non-manufacturing sphere also ended up in the positive zone. It recovered to 45 points, and although this indicator is still below the key 50-point mark, the trend itself is positive.

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Thus, the prevailing fundamental background allowed the dollar to stop its decline and even demonstrate a correction, reflecting increased demand. If the protest movement in the United States fades away, and Washington continues to take a passive position in the US-China conflict, the dollar will receive an additional reason for its corrective growth to the maximum this week, that is, to the level of 98.04.

Irina Manzenko,
Analytical expert of InstaForex
© 2007-2022
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