The Strong Dollar Conundrum Facing the Trump administration

Economic

Forex

Summary:

During his 2002 testimony before Congress, then-Federal Reserve Chair Alan Greenspan wryly observed: “There may be more forecasting of exchange rates, with less success, than almost any other economic variable.” Two-plus decades later, predicting the future path of exchange rates continues to pose a challenge, especially as currency matters take centerstage in policy debates.

The dollar was expected to weaken in 2024, with markets initially pricing in six or more Fed rate cuts. Reality, however, played out differently, and the dollar actually rose sharply. U.S. economic growth was more robust than expected and the disinflationary process stalled out in the second half of 2024. Consequently, the first rate cut was delayed till September and the year ended with just three Fed cuts.

Furthermore, the Trump-led Republican sweep in last November’s election led market participants to expect passage of potentially growth-enhancing fiscal measures on the regulatory and tax front. Trade tariffs and restrictive immigration policies, both of which are likely to be inflationary, are also expected to be high on the agenda of the Trump administration. Consequently, Treasury bond yields have risen sharply since the election, providing a boost to the dollar.

Early in 2025, diminished expectations for rate cuts on the back of continued U.S. economic strength and a potential revival of inflationary pressures have led many to forecast a further strengthening of the dollar. Currency traders are betting that the ‘U.S. exceptionalism’ trend (which refers to the post-pandemic outperformance of the American economy and equity markets vis-à-vis its advanced economy peers) will persist for the foreseeable future.

This creates a bit of a conundrum for the incoming Trump administration, which has repeatedly expressed a preference for a weaker U.S. dollar to limit imports and address the persistence of large U.S. trade and current account deficits.

A fundamental open-economic identity posits that, for each individual economy, the difference between total national saving (the sum of private and public sector saving) and gross domestic private investment should equal the current account balance. Simply put, a country with excess national saving will run a current account surplus and be a net foreign lender, and a country encountering a national saving shortfall will experience a current account deficit and be forced to borrow from abroad.

There is considerable debate surrounding the underlying forces responsible for the persistence of U.S. trade and current account deficits. Some have argued that the primary factor is the low level of national saving in the U.S. (often tied to the government’s tendency to frequently run large budget deficits). Proponents of this view note that tariffs are unlikely to bear much fruit if the domestic saving shortfall is not resolved. Martin Feldstein, who chaired the White House Council of Economic Advisers during President Reagan’s first term, once noted that “changes in America’s saving rate hold the key to its trade balance, as well as to its long-term level of real incomes. Blaming others won’t alter that fact.”

Meanwhile, in a recent report, Stephen Miran, the Harvard-trained economist who is expected to chair President-elect Trump’s Council of Economic Advisers, places much of the blame for the persistent trade imbalances on the rest of the world’s insatiable demand for dollar-denominated safe assets. The historical antecedent of this viewpoint is the Triffin dilemma. Robert Triffin had famously questioned the stability of the Bretton Woods arrangement by noting that the sovereign issuing the world’s reserve currency will have to run persistent balance of payment deficits in order to satisfy the rest of the world’s ever-increasing need for global liquidity.

Somewhat controversially, Miran argues that the “root of the economic imbalances lies in persistent dollar overvaluation that prevents the balancing of international trade, and this overvaluation is driven by inelastic demand for reserve assets. As global GDP grows, it becomes increasingly burdensome for the United States to finance the provision of reserve assets and the defense umbrella, as the manufacturing and tradeable sectors bear the brunt of the costs.”

It is likely that both the domestic saving shortfall in the U.S. and the global demand for dollar-denominated safe assets are factors contributing to the persistence of trade imbalances. So, what are the potential solutions?

Miran suggests that, under Trump 2.0, a radical rethink may be on the cards: “Sweeping tariffs and a shift away from strong dollar policy can have some of the broadest ramifications of any policies in decades, fundamentally reshaping the global trade and financial systems.”

Such dramatic policy shifts raise the specter of high inflation and global economic turmoil. Can modest and targeted measures help achieve a weakening of the dollar and a reduction in global imbalances?

Domestically, U.S. fiscal consolidation will help alleviate bond market concerns and lower long-dated treasury yields (and contribute to a narrowing of interest-rate differentials). Proposals to enhance government efficiency and reduce wasteful spending are good first steps. However, truly improving the long-term fiscal outlook will require tough and painful choices.

Internationally, a multilateral currency agreement akin to the 1985 Plaza Accord appears unlikely. Less ambitious measures may still bear fruit. Encouraging Bank of Japan (which no longer faces a deflation threat) to reduce its reliance on ultra-loose monetary policy will help curtail distortionary carry trade transactions. Pressuring Chinese authorities to undertake structural reforms to boost domestic consumption and reduce overcapacity will help lower that county’s trillion-dollar trade surplus. Compelling Germany and other EU countries with large trade surpluses to boost domestic investment spending would also help rebalance the global economy.

Source:Vivekanand Jayakumar

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Owen Li

Economic

Are the bond vigilantes returning?

Tax cuts are coming in the US. Yet, at this stage, the scale that will be passed by US president-elect Donald Trump’s administration is unknown. It’s likely to increase the federal budget deficit and push the federal public debt on an even higher trajectory – well into the triple digits as a share of gross domestic product over the coming years.

Investors are wary. Partly due to the US fiscal trajectory, the 10-year US Treasury bond yield has steadily risen to close to 4.70%. This is not a ‘Liz Truss’ moment of fiscal panic but there is a renewed risk that bond vigilantes will return in full force this year.

In the UK itself, the 10-year gilt yield has surpassed the level reached during former Prime Minister Liz Truss’s tenure in October 2022 to above 4.80%. This presents a headache for Chancellor Rachel Reeves who is trying to balance fiscal consolidation with a struggling economy. She may be forced to amend her half-baked fiscal plans to stick to the government’s fiscal rules or risk a further market backlash.

France faces a similar dilemma. The new, fractured government has struggled to pass a 2025 budget with the latest plans only outlining moderate fiscal consolation. In a recent speech, Banque de France Governor, François Villeroy de Galhau, outlined the need for ‘reducing budgetary and tax uncertainty, which is weighing on businesses and households’. However, it’s unclear whether there will be sustained political appetite for fiscal tightening, which could lead to further investor concerns.

Will Germany release the debt brake?

One country with fiscal room is Germany. The debt brake (‘Schuldenbremse’), which limits Germany’s structural deficits to 0.35% of GDP, has been a key fiscal anchor for the country. Its public debt-to-GDP ratio has dropped towards 60%, while other major European countries have seen it rise to over 100%. But amid stagnant growth and a broken economic model, there are growing calls for the government to loosen the purse strings.

There may be a tentative shift towards higher public spending this year. The conservative Christian Democratic Union’s Friedrich Merz is almost certain to win February’s election and has hinted that the debt brake may be loosened. But Merz is unlikely to open the floodgates for significant fiscal stimulus. In the meantime, Germany’s economy will remain in the doldrums – a topic OMFIF will explore with their finance ministry and central bank in February 2025.

Will China unleash a fiscal bazooka?

Another struggling economy with fiscal space is China. Its economic weakness prompted fresh policy stimulus in late 2024 – initially by monetary authorities and then via fiscal policy through a Rmb10tn ($1.4tn) package to allow local governments to restructure their debts. These efforts prompted a sharp turnaround in the Chinese equity market.

The authorities are gearing up for more fiscal stimulus in 2025 amid looming US tariffs and continuing structural headwinds. Vice Finance Minister Liao Min stated ‘the direction of fiscal policy in 2025 is clear, very proactive’ and that ‘we will provide strong support for economic and social development’. This may increasingly target households through subsidies for consumer goods. But China’s government remains cautious in unleashing a ‘bazooka’ such as direct handouts to consumers.

Can emerging markets escape debt troubles?

Most major EMs have weathered the various economic storms of the past five years and 2024 saw some positive news on the fiscal front. Argentina witnessed a sharp turnaround as President Javier Milei delivered a primary surplus in his first year. There was fresh optimism on South Africa as the new coalition government embarked on economic reforms, prompting S&P to improve its sovereign credit rating outlook. Elsewhere in Africa, Ghana and Zambia finalised their sovereign debt restructuring deals last year.

However, many economies are not yet out of the woods. As highlighted in OMFIF’s Absa Africa Financial Markets Index 2024, 18 of 29 countries covered are in, or at risk of, debt distress – as deemed by the International Monetary Fund. Rising global bond yields, a strong dollar and heightened geopolitical tensions are a toxic mix for many emerging and frontier economies. Meanwhile, major EMs such as Brazil, Mexico and Hungary face home-grown fiscal challenges.

Will governments embrace new solutions?

The proposed US Department of Government Efficiency may be one of Elon Musk’s new pet projects. However, it does shine a light on an important topic: how to improve the effectiveness of government spending. Solving this problem will ultimately allow governments to tackle their rising public debt while meeting the demands for greater public spending on areas such as defence, healthcare and pensions.

In a report jointly published with EY, ‘The future of public money’ highlighted the need for governments to embrace new frameworks, accounting standards and technology. Most policy-makers remain unaware or resistant to structural changes on these fronts. But as fiscal problems mount, policy-makers may be forced to embrace new innovations and solutions. The risk of inaction is rising.

Source:OMFIF

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Energy

In July 2024, the United Kingdom elected its first Labour administration in 14 years, after a long Conservative reign. The Labour government, led by Sir Keir Starmer, immediately unveiled ambitious energy and climate goals that would “make Britain a clean energy superpower” within a remarkably short time. These plans would “cut bills, create jobs and deliver security with cheaper, zero-carbon electricity by 2030, accelerating to net zero,” Prime Minister Starmer’s government states, arguing that those objectives are closely intertwined. A zero-carbon electricity system would lower bills “for good” and prevent citizens from ever again being “vulnerable to dictators like [Russian President Vladimir] Putin.”

To achieve zero-carbon electricity, Labour aims to double onshore wind (scrapping the restrictions introduced by former Prime Minister David Cameron in 2015), triple solar power and quadruple offshore wind by 2030. It has also pledged to invest nearly GBP 22 billion in projects to capture and store carbon emissions from energy, industry and hydrogen production over the next 25 years – one of its biggest green spending promises. The government further wants to accelerate the deployment of nuclear energy, including extending the lifetime of existing plants.

Additionally, the UK plans to set up a new state-owned company, Great British Energy, capitalized with GBP 8.3 billion. Headquartered in Scotland, the company will partner with industry and trade unions to deliver clean power by coinvesting in leading technologies, supporting capital-intensive projects and deploying local energy production. Beyond the high-level descriptions, however, the company’s remit remains vague. Another new institution will be set up: the National Wealth Fund, aiming to “unlock billions of pounds of investment in the UK’s world-leading green and growth industries.”

Facts & figures

Share of fossil fuels in the UK’s primary energy mix

From a climate perspective, that non-exhaustive list is a dream come true. However, it raises the question as to why previous governments did not pursue similar ambitions even though they were not climate unfriendly, as the UK’s progress on green energy confirms. It is also unclear how many of those claims constitute political rhetoric. There is often a wide gap between what a government promises to win an election and what it can deliver once in power.

Market realities also matter: It takes only one major global energy crisis to derail the plans of even the most determined governments. Assuming market conditions favor the Labour government, technical and commercial realities will likely keep it from meeting some of its ambitious energy targets, especially within the timeframes it has set.

Speeding up a transition already under way

In recent years, the UK’s primary energy and electricity mixes have undergone a remarkable transformation. The Labour government’s current efforts may seem novel or disruptive at first glance, but they are in fact an attempt to accelerate an existing trend.

The UK was the birthplace of coal power, which fueled the industrial revolution that spread across the world. However, after 142 years of coal use, on October 1, 2024, the country officially closed its last coal-fired power plant – a unique milestone among the world’s largest economies. In that respect, the Labour government’s decision to not grant new coal licenses will not make any difference.

Facts & figures

Electricity mix in selected European countries

Both natural gas, supported by production from the North Sea, and the fast deployment of renewable energy particularly since the late 2000s, have helped the UK pivot away from fossil fuel. The country has the highest combined share of natural gas and renewable energy in its power mix in Europe. The other important contributor to electricity generation is nuclear power, which accounts for 14 percent. The remainder comes from oil and hydropower.

For the UK to achieve its ambitious target of clean energy by 2030, it should eliminate all fossil fuels from its mix – primarily natural gas – which currently account for more than a third of the country’s power generation. While natural gas helped to crowd out coal over decades, the question today is which other fuels could replace natural gas in less than six years.

Only four countries in the world produce almost 100 percent of their electricity from renewable sources: Albania, Bhutan, Lesotho and Nepal – all with only a fraction of the UK’s population and economy.

Furthermore, these countries have met that target largely through hydropower, which currently drives less than 2 percent of power generation in the UK.

If the UK achieves its targets for the expansion of green technologies, it will get closer to its ambitions, but is still unlikely to meet its goal. Nuclear energy can make a notable difference, but the track record of nuclear power development – irrespective of which government is in place – leaves little room for optimism.

Renewable energy also requires backup facilities, because its power generation can vary greatly depending on the weather or other circumstances. Without nuclear or hydrogen to fill this gap, the UK will likely require natural gas. The Labour government announced it would maintain a strategic reserve of gas power stations to guarantee supply security. For now, fossil fuels remain essential in meeting energy reliability goals.

Some argue that the zero-carbon goal was loosely defined during the electoral campaign, and that the government will now need to clarify its practical implications. There will certainly be days between now and 2030 when the UK achieves 100 percent clean energy. If this is all the Labour government intended, it is a relatively easy goal. As it stands now, however, the UK is unlikely to sustain the target in the long term.

The risks of renewable energy

The Labour government is trying to boost the country’s energy security by emphasizing the development of “homegrown energy” and reducing reliance on energy imports. Increasing onshore wind capacity from 15 gigawatts (GW) to 30 GW, and offshore wind capacity from 15 GW to 60 GW by 2030 is one example.

The UK is home to abundant offshore wind resources, particularly in the North Sea, supported by its long coastline and shallow continental shelf, which are ideal for large offshore wind farms. It is already Europe’s largest producer of offshore wind (49 terrawatt hours – TWh) and the region’s second-largest wind power producer (82 TWh) after Germany (141 TWh), having overtaken Spain in 2017.

However, the idea of homegrown renewable energy is somewhat misleading. Generating electricity when the sun shines or the wind blows in the UK is one thing, but the security of the entire supply chain must also be considered. Here, several risks remain.

Facts & figures

Nominal government revenues from oil and gas in the UK.

Source:ING Think

Risk Warnings and Disclaimers

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Central Bank

A tightening in policy would underscore the central bank's resolve to steadily push up interest rates, now at 0.25%, to near 1% - a level analysts see as neither cooling nor overheating Japan's economy.

At the two-day meeting ending on Friday, the BOJ is likely to raise its short-term policy rate to 0.5% unless Trump's inaugural speech and executive orders upend financial markets, sources have told Reuters.

In a quarterly outlook report, the board is also expected to raise its price forecasts on growing prospects that broadening wage gains will keep Japan on track to sustainably hit the bank's 2% inflation target.

A hike by the BOJ would be the first since July last year when the move, coupled with weak U.S. jobs data, shocked traders and triggered a rout in global markets in early August.

Keen to avoid a recurrence, the BOJ has carefully prepared markets with clear signals by Governor Kazuo Ueda and his deputy last week that a rate hike was on the cards. The remarks caused the yen to rebound as markets priced in a roughly 80% chance of a rate increase on Friday.

There were also hints of near-term action last month. While the BOJ held off raising rates at the Dec. 18-19 meeting, hawkish board member Naoki Tamura proposed pushing up rates. Some of his colleagues also saw conditions fall into place for an imminent rate hike, minutes of the meeting showed.

With a policy tightening this week seen as a near certainty, market attention is shifting to Ueda's post-meeting briefing for clues on the timing and pace of subsequent increases.

As inflation has exceeded the BOJ's 2% target for nearly three years and the weak yen has kept import costs elevated, Ueda is likely to stress policymakers' resolve to continue raising interest rates.

But there is good reason to tread cautiously. While the International Monetary Fund raised its forecast for global growth in 2025, Trump's policies risk destabilising markets and stoking uncertainty about the outlook for Japan's export-reliant economy.

Domestic political uncertainty could heighten, too, as Prime Minister Shigeru Ishiba's minority coalition may struggle to pass budget through parliament and win an upper house election scheduled in July.

The economic damage caused by past ill-fated rate hikes also haunt BOJ policymakers. The BOJ ended quantitative easing in 2006 and pushed short-term rates to 0.5% in 2007, moves that triggered a storm of political criticism as delaying an end to deflation.

The BOJ cut rates from 0.5% to 0.3% in October 2008, then to 0.1% in December of that year, as the global financial crisis pushed Japan into recession. Since then, various unconventional steps have kept borrowing costs stuck near zero.

"Japan had a permanently low growth rate, inflation rate and lower level of interest rates. So policymakers, investors and the business community still ask - have we really broken free from that?," said Jeffrey Young, chief executive officer of DeepMacro.

"The BOJ is going to have to explain very carefully that they're raising rates to move away from the extraordinary policy that they adopted."

Source:Reuters

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Alex

Economic

US growth may ease over the year, but many forecasters still see growth around 2.25%. The irrepressible consumer will help avert a downturn, putting paid again to the hard landing crowd. US economic non-policy remains a mess.

Euro area growth should ‘numerically’ pick up but remain weak, especially in Germany, which may witness a dead cat bounce. However, PIGS (Portugal, Ireland, Greece and Spain) will fly.

Chinese policy-makers are shifting towards cautious monetary and fiscal stimulus, but won’t overcome the economy’s massive structural debt, housing, deflationary and confidence headwinds. In the spring, authorities will post a growth target perhaps of around 5% and they’ll hit it one way or another. India remains somewhat a bright spot.

Japan’s 2025 growth rate will bounce back, supported by wage gains and because 2024 gross domestic product was held down by a sharp first quarter contraction.

Latin American growth remains hampered by longstanding productivity and corruption problems, with Brazil’s financial woes intensifying and US-Mexican relations undermining confidence. Argentina may be the star!

Fragmentation and flailing multilateralism

The major economic strides of the last 80 years were facilitated by America’s hegemonic power and the security structure it offered within which to pursue the liberal order.

But America’s relative global weight has waned and the US turned somewhat inward. After the 2008 financial crisis, the G20 was touted as the premier forum for international economic co-operation. But it then floundered, riven by Russia’s brutality against Ukraine, poor performance in many emerging markets, Trump’s isolationism and bellicosity, and fraying US-China relations.

The US, Europe and Japan reconnected in a revitalised, cohesive G7 on issues such as financial sanctions, cybercrime, anti-money laundering and helping Ukraine against Russia. But that unity too is likely to fray as Trump 2.0 injects uncertainty and volatility.

Liberal trade and investment are under siege

The Joe Biden administration was little different than a revanchist Trump 1.0. Now, Trump 2.0 threatens 25% tariffs on Mexico and China – America’s two largest trading partners – while across the board tariffs of 10% to 20% would batter Europe and 60% China. If implemented, a massive hit to global growth will be delivered. Some suggest the tariff threats are merely a negotiating tactic for unspecified concessions. Who knows?

Protecting national security is essential. But much is simply protectionism. Is America truly afraid that Chinese solar panels and electric vehicles will undermine national security? Is a mothballed steel plant and lost jobs better than one owned by a firm from the country of a close ally that protects jobs?

Decoupling continues amid growing US-China tensions

Everybody in the US is a China hawk. The only question is how big the talons are. The US is possibly on the verge of banning TikTok, further cutting off less-than-advanced chips, adding more firms to the entity list, on top of tariffs.

President Xi Jinping will stand up to Trump and China will retaliate. US levers on China are not as strong as under Trump 1.0. But China is not doing itself any favours in the West’s eyes by embracing President Vladimir Putin, looking indifferently on Russia’s war against Ukraine and fomenting hostility in the South China Sea.

Europe remains weak and divided

Trump is dismissive of Europe, America’s staunchest ally. The French government remains stalemated. No matter who runs Germany, economic policy is hamstrung and the country’s growth model broken. Surprisingly, Italy is Europe’s island of stability in a stormy sea.

Skirmishing between European Union member states and Brussels will continue. A divided Europe disdainful of Trump 2.0 won’t formulate a coherent response.

Poor macroeconomic policy, squeezed real incomes undermine public trust

Inflation is down but productivity growth languishes, squeezing real incomes and bolstering insecurity and populism.

Public debt is high in the US, much of Europe, Japan and China. In the US, the fiscal trajectory is unsustainable. Trump is likely to boost deficits from the already absurdly high level of 7% of GDP, pushing up longer-term rates, hurting investment and causing market indigestion. Will bond vigilantes return?

European high-debt countries will seek to restrain deficits, and Germany won’t pursue major workarounds from its rigid debt brake. Structural reform will continue to flag as policy-makers are wary of political fallout from adjustment costs.

China has some fiscal space at the centre, but is cautious in using it, let alone helping consumers rather than overhauling its inefficient investment and export-led growth model.

At some point, the fiscal chickens and unwillingness to revamp growth models will come home to roost. Further real income squeezes are likely and huge bouts of market volatility may be a sign of more trouble.

The 2025 global economy will underwhelm. America’s relative economic and political weight is still strong, but waning. Across the world, political fragmentation, hits to globalisation, uncertainty, flailing multilateralism, poor economic policy and mediocre leadership will accelerate the weakening of the global fabric. There are many culprits, but the US is at the heart of this own goal.

Source：News commentary-OMFIF

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ING

Economic

Energy – Specs add to Brent long

Despite the rally in crude oil prices running out of steam towards the end of last week, ICE Brent still managed to settle almost 1.3% higher on the week and remain above US$80/bbl. There is a fair amount of uncertainty across markets coming into this week given the inauguration of President Trump and the raft of executive orders he reportedly is planning to sign. This combined with it being a US holiday today, means that some market participants may have decided to take some risk off the table.

The latest positioning data shows that speculators increased their net long in ICE Brent by 27,473 lots over the last reporting week to leave them with a net long of 254,332 lots as of last Tuesday. The move was driven by fresh longs entering the market and left speculators with their largest net long since May. The strong buying reflects supply concerns following the announcement of US sanctions against the Russian energy industry.

In the US, there are also some short-term supply risks facing oil and gas production with freezing weather conditions in parts of Texas and New Mexico to persist over the next couple of days, which could lead to some production having to be shut in. Significant production losses were seen in February 2021 as a result of freezing weather, while in January 2024, colder weather conditions also led to some supply losses.

Output data from China on Friday shows that refineries increased the amount of crude oil they processed by 1.3% year-on-year in December. However, for full-year 2024, refinery activity still fell by 3.6% YoY, reflecting weaker domestic demand. Output and trade numbers suggest that apparent oil demand in December came in at a little more than 13.9m b/d, down from 14m b/d the previous month, but up 0.6% YoY.

Metals – Aluminium continues to rally on China growth

LME aluminium ended last week on a strong footing, boosted by signs of economic recovery in China following a series of stimulus measures over the last couple of months. China’s economic data released last Friday showed China’s GDP in 2024 expanded 5%, meeting the government’s target. The final quarter of the year saw growth of 5.4%, which was the fastest pace in six quarters.

The National Bureau of Statistics (NBS) numbers released last week showed monthly primary aluminium production in China rising 4.2% YoY to 3.8mt in December 2024 primarily due to the additions from new production capacity in the Northwestern region of Xinjiang. Cumulatively, production rose 4.6% YoY to around 44mt over Jan’24 – Dec’24. In other metals, monthly crude steel production rose 11.8% YoY to 76mt last month. However, cumulative output fell 1.7% YoY to 1,005.1mt in 2024, the lowest in five years as weakness in the property market continues to weigh on steel demand.

Weekly data from the Shanghai Futures Exchange (ShFE) showed inventories for base metals remaining mixed over the last week. Aluminium weekly stocks fell by 3,694 tonnes for a twelfth consecutive week to 178,474 tonnes as of last Friday, the lowest since 23 February 2024. Zinc inventories decreased by 294 tonnes (-1.4% week-on-week) for a ninth straight week to 21,040 tonnes (the lowest since 30 December 2022), while lead inventories declined by 1,351 tonnes for a fifth consecutive week to 43,503 tonnes at the end of last week. Meanwhile, weekly inventories for copper and nickel rose by 12.9% WoW and 5.2% WoW, respectively.

Agriculture – India set to allow sugar exports

There are reports that the Indian government is set to allow the export of 1m tonnes of sugar during the current 2024/25 season, which may come as a surprise to many in the market given that there are some that expect lower domestic sugar output this season. The government is yet to issue an official order, but the news is likely to keep pressure on global prices. No.11 raw sugar has already been under pressure so far this year with it down more than 5%, which likely partly reflects speculation around the potential for Indian exports. CFTC data shows that speculators sold sugar aggressively over the last reporting week, selling 47,969 lots to leave them with a net short of 507 lots. While this is a marginal short position, it is the first time since August that speculators have been short sugar.

Source: ING

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Forex

There was also a further favourable impact on the UK bond market which helped underpin the Pound.

The 10-year yield declined to around 4.73% from 16-year highs above 4.90% earlier in the week. The 30-year bond yield also posted sharp losses which eased fiscal fears to some extent.

The Pound to Dollar (GBP/USD) exchange rate jumped to 5-day highs at 1.2300 before settling just below this level.

Scotiabank commented on the GBP/USD outlook; “Monday and Tuesday’s sessions suggested firm demand on dips below 1.22 and a similar pattern is evident so far today.”

Danske sees scope for a further dollar correction weaker; “We continue to hold the view that the USD is susceptible to a near-term setback, as many dollar-positive drivers appear largely priced into the market, leaving the greenback exposed to downside risks.”

The Pound to Euro (GBP/EUR) exchange rate also rallied to 1.1885.

US consumer prices increased 0.4% for December with the headline inflation rate increasing to 2.9% from 2.7% and in line with consensus forecasts.

Core prices increased 0.2% compared with market expectations of 0.3% with the annual rate edging lower to 3.2% from 3.3% and compared with forecasts of an unchanged rate.

There was a rally in bonds following the data with the 10-year yield declining to 4.70% from 4.77%.

There was a small shift in Federal Reserve pricing, although markets were still only pricing in around a 40% chance of a rate cut by June.

There will inevitably an important element of uncertainty ahead of President Trump’s inauguration next week.

In particular, there are fears over an imposition of tariffs through executive orders.

ING remains uneasy over the macroeconomic mix and the risk of renewed selling in bond markets; “Even if tariffs are hiked gradually, markets may not be as optimistic as Trump’s team that inflation can be controlled.”

Scotiabank sees scope for some dollar losses; “Markets are also reflecting some caution about what sort of tariff regime will follow next week’s inauguration, weighing on the USD. Extended USD positioning and somewhat frothy USD sentiment continue to suggest—to me, at least— that the USD is prone to consolidation or a correction.”

Earlier, a decline in UK core inflation to 3.2% from 3.5% and below expectations of 3.4% helped underpin the Pound. Scotiabank commented; “Core and Services price measures slowed more significantly, boosting expectations that the BoE will proceed with rate cuts. The data brings some relief to the Gilts market after the recent turmoil.”

Source:Exchange Rates

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The Strong Dollar Conundrum Facing the Trump administration

Source:Vivekanand Jayakumar

Outlook 2025: Five Fiscal Trends To Watch

Are the bond vigilantes returning?

Will Germany release the debt brake?

Will China unleash a fiscal bazooka?

Can emerging markets escape debt troubles?

Will governments embrace new solutions?

Source:OMFIF

The Uk Attempts To Become a ‘Clean Energy Superpower’

Facts & figures

Share of fossil fuels in the UK’s primary energy mix

Speeding up a transition already under way

Facts & figures

Electricity mix in selected European countries

The risks of renewable energy

Facts & figures

Source:ING Think

Bank of Japan poised to raise rates to highest in 17 years

Source:Reuters

Outlook 2025: Global Economy Will Underwhelm Amid Huge Uncertainty

Fragmentation and flailing multilateralism

Liberal trade and investment are under siege

Decoupling continues amid growing US-China tensions

Europe remains weak and divided

Poor macroeconomic policy, squeezed real incomes undermine public trust

Source：News commentary-OMFIF

The Commodities Feed: Inauguration Day

Energy – Specs add to Brent long

Metals – Aluminium continues to rally on China growth

Agriculture – India set to allow sugar exports

Source: ING

The Us Dollar "Is Prone To Consolidation Or A Correction" Say Foreign Exchange Analysts

Source:Exchange Rates

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