Another won bites the dust

What matters in U.S. and global markets today

By EMEA markets breaking news editor Amanda Cooper

It's looking very much like another "risk-off" day for the markets today, where stocks, the dollar and commodities are down, while bond prices are ticking up and safe-haven currencies like the Japanese yen and the Swiss franc are enjoying a rally.

The sugar rush earlier this week from the U.S./China trade truce seems to have given way to a sugar hangover. Traders seeking another hit will now be scouring data on U.S. consumer spending and various surveys of regional business activity, while also hoping to hear soothing words from Fed Chair Jerome Powell.

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Every U.S. administration for decades has indicated it maintains a strong dollar policy. It's no secret that Trump's administration wants a weaker currency to help grease the wheels as it seeks to get the rest of the world to buy more U.S. goods and services. 

The flipside, of course, is that a weaker currency will drive up the cost of any imported goods and services, thereby heaping more pain on a U.S. consumer that already face a hit from tariffs - even if these levies are not currently at the eye-watering levels Trump first floated as part of his April 2 "Liberation Day" tariff bonanza.

Against a basket of currencies, the dollar has fallen 7% this year, which puts it on course for its biggest annual decline since 2017, when the index fell almost 10%. However, the dollar index might not be the best representation of what is happening with the U.S. currency right now. 

The index was established in 1973 by the Federal Reserve as a basket of the currencies of six large U.S. trading partners and currently includes the euro, the Japanese yen, the pound, the Canadian dollar, the Swiss franc and the Swedish crown.

The six biggest U.S. trading partners now are Canada, Mexico, China, Germany, Japan and South Korea. A simple average of the year-to-date decline of the dollar against those currencies is roughly 5.6%, although this does not take into account any kind of weighting based on trade.

Trump would like to see a number of currencies appreciate against the dollar and, Asian exporting nations could be among the candidates. 

Currency markets got something of a bombshell on Wednesday in the form of reports that South Korean and U.S. officials sat down last week to talk trade and discuss the dollar/won exchange rate. Cue a rip higher in the Korean won, which has already strengthened by more than 5% since April 2, as it heads for a third straight daily gain.

As ever with markets, these things rarely happen in isolation. The move in the won has shades of the unprecedented rally in the Taiwan dollar earlier this month, which surged 6% in two days, clocking its largest single-day percentage gain since the 1980s.

The parallels between the two has given rise to speculation that the Trump administration might shift its gaze to the FX market and put pressure on its trading partners to allow their currencies to appreciate in value, thereby removing some of what the president perceives as an unfair advantage.

Big exporters tend to like big currency weakness. Haggling over import duties on various goods and services can bring mutual benefits to both parties, even with the compromises that inevitably come along with that process. 

FX, however, is a lot more binary. If one side of a currency pair depreciates, the other must appreciate and that might be a tougher pill to swallow.