Investing.com – The dollar surged on Monday, underpinned by a jump in Treasury yields amid optimism that the U.S.-China trade deal would avert a tariff-led recession, but Deutsche Bank argues that the recent trade agreements are more beneficial to the rest of the world, likely keeping the greenback’s upside in check.
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The dollar index, a measure of the greenback against a basket of currencies, jumped 1.6% to 101.78. Treasury yields rose sharply as investors shifted away from safe-haven assets, pushing the 10-year yield above 4.45%.
After weekend negotiations in Geneva, China and the U.S. agreed to a 90-day pause on tariffs imposed on each other
“This announcement exceeds our expectations and is also better than what the market would have predicted back in March,” Deutsche Bank strategists said in a client note. However, they caution that while the deal reduces uncertainty, the benefits appear skewed toward global growth rather than the U.S. dollar.
The breakthrough on trade came just days after the U.S. and UK clinched a trade deal, as Washington steps up trade negotiations.
“The totality of the newsflow over the last few weeks favours the rest of the world more so than the US and therefore works dollar negative, especially against growth-sensitive FX,” they added.
The U.S.-China agreement effectively sets a cap and floor on U.S. tariffs, the strategists said, with China’s tariff rate now at 30%-significantly lower than many had anticipated-and the UK’s at 10%, providing greater clarity and reducing the peak of trade war uncertainty.
This shift, however, combined with fiscal easing in major economies such as Germany, Canada, Australia, Japan, and China’s front-loaded stimulus, is improving the global growth outlook.
The backdrop of an improved outlook on global growth, however, isn’t the panacea that many expect as U.S. fiscal stance remains a key uncertainty.
"The one policy area where uncertainty remains very high is the US fiscal stance, with visibility still low on how the Republican fiscal hawks and doves will reconcile their difference, Deutsche Bank said.
The bank also points out that a less antagonistic U.S. administration could support dollar inflows by easing external financing pressures, although the peak dollar allocation damage has likely already occurred.
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