The pound to US dollar exchange rate weakened this week, partly because UK Prime Minister Boris Johnson will soon legislate, to prohibit the British government from extending the UK’s future EU trade talks beyond the end of next year.
Turning to the USA, the greenback gained this week, for a number of reasons. To begin, US President Donald Trump signed a “first phase” trade deal with China, to limit their commercial war on each other.
Washington will cut its tariffs on hundreds of billions of dollars worth of Chinese imports, while Beijing will buy more US farm goods. This has strengthened the US dollar because as a result of these changes Chinese goods will be cheaper in America. This means American shoppers who buy these goods will have more spare dollars to spend elsewhere, thereby bolstering the United States’ economic growth. So the announcement of the trade truce has supported the buck.
The US House of Representatives has impeached President Trump. This week, the Democrat-controlled House voted by 230 to 197 to impeach the current President, for abuse of power in the ongoing Ukraine scandal. President Trump is only the third US Commander-In-Chief in history to be impeached, following Andrew Johnson in 1868, and Bill Clinton in 1998.
President Trump will now go to trial in the US Senate, where theoretically he could be stripped of office. However, President Trump’s Republican Party controls the Senate, so the impeachment is unlikely to advance. This risks reducing the Democrats’ actions to political theatre, and the US dollar thus remains supported.
Looking ahead to 2020, a significant question is whether the USA’s economic expansion will continue. It’s now 126 months old, the longest in America’s history, leading many investors to wonder when the USA might enter recession.
To sustain the expansion, the US Federal Reserve could cut interest rates further next year, from their current 1.5%-1.75%. Traditionally, this would weaken the greenback, by making it less profitable to invest in USD-denominated assets.
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