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Dollar Optimism Drives Markets

Against a basket of currencies, the US dollar struck an 8-week high on Tuesday after US lawmakers reached an agreement on border security funding and as hopes build for a breakthrough in US-China trade talks.

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US dollar optimism continues to be the dominant theme in markets.

Reports on Tuesday indicating that a further US government shutdown would be averted were “good news for the markets,” Art Hogan of National Securities told CNBC. That “good news” translated into a US Dollar Index rate of 97.2—the highest since mid-December.

AUD to USD - 3 month chart to 12 Feb
AUD/USD - 3 month chart to 12 Feb

Per reports, Democratic and Republican negotiators have finally struck a deal to finance the construction of a barrier of sorts (not the concrete wall President Trump had demanded) along the US-Mexican border, although the agreement still needs to be approved by Congress.

On trade talks, negotiating teams from Washington and Beijing will meet this week in an effort to reach terms on a mutually-acceptable deal. Trump has previously threatened to increase tariffs on $200 billion worth of Chinese goods to 25 percent, from 10 percent, if Beijing doesn’t offer sufficient concessions by March-1. Tariffs on this scale would do serious damage to investor confidence and might even spark a global recession, analysts believe.

Speaking on the dollar this week were forecasters at the wealth management arm of Citibank, based in Hong Kong. Though they acknowledged upside risks associated with severe risk-off developments, “[dollar] depreciation continues in the medium term.”

“As the Trump fiscal stimulus fades in terms of the delta to economic activity, the US dollar may be undermined,” the Citi team wrote. In addition, “policies elsewhere [in the world] may support other currencies against the dollar.”

Citibank forecasts the US Dollar Index 5 percent lower in 6-12 months’ time at 92.50.

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