The value of the US Dollar dropped on Wednesday following the news that the United States and China had made progress towards resolving their ongoing trade war after three days of discussions in Beijing.
As a result, the Dollar Index fell by 0.75% in mid-morning trading yesterday, while the Euro gained 0.9% and the Pound Sterling gained 0.27% against the Dollar respectively. A full statement is expected to be issued by US and Chinese officials jointly later today.
Optimism is the word of the day for investors, with the stock markets showing positive signs in the past few days. China’s Commerce Ministry said that the negotiations held were “extensive, deep and detailed", while a US Trade representative spoke of "China's pledge to purchase a substantial amount of agricultural, energy, manufactured, and other products and services from the United States".
The drop in the Dollar is good – which may sound counter-intuitive – but it shows that investors are stepping away from the USD and reducing their dependency on it as a safe-haven. The reduction is also welcome in the face of growing US debts; a deal for which the restructuring of still has to be negotiated by President Trump. A weaker Dollar makes that debt and its interest payments cheaper.
The markets were boosted last Friday as well, when Federal Reserve chairman Jerome Powell conceded that there were risks to the US economy and that the Fed would be patient in the face of policy decisions; a hint that the Reserve would not pursue as many interest rate rises as it had in 2018. This is significant because despite strong US jobs figures, the American economic boom period seems to be winding up. President Trump’s tax relief for the richest appears to be wearing off, with investment in the US coming down slowly but surely. A weaker Dollar would help businesses still afford to loan and invest.
The trade talk news is also welcome here in the UK, with the weak Pound doing little to benefit exports in the face of Brexit. As the Pound gains ground against the Dollar, investors may be reassured to return to the UK and invest in British businesses regardless of the ongoing political uncertainty.